At the very low risk end of the scale is money market investing. To get a quick and easy understanding of this very large sector, simply imagine lenders and borrowers coming together to provide or access large sums of money. In other words, borrowing.
The money markets operate on an incredibly large scale allowing incredible sums to change hands. This is generally the realm of multinational corporations, Malta naturalisation, financial institutions and local and national government bodies. Most of this borrowing is considered to be ‘short-term’ – in other words, loans with a term of under one year like these.
As with any financial market, the money markets have their own specialised jargon and language (information here) and – of course – major players.
There are some product names that are traded on the money markets that are everyday words, but probably little is known about them outside high-finance. For example, LIBOR, short-term Treasury Bills, EuroDollars and Certificates of Deposit are within the money market environment.
Clearly, it is not an environment that would naturally be easy for a private investor to enter. To enable access to this market (it provides a low risk home for money for investors and adds fantasy football liquidity to the market for borrowers), funds exist to provide access. These are known as collective investment funds and operate in a similar way to unit trusts (in the UK) or mutual funds (in the US).
The money of investors will be ‘pooled’ with many other investors, enabling investments to be made as a group and diversification to be achieved. In the lending world, the risk is that a borrower (a company in this market) may cease trading or fail to pay the interest and capital of it’s debts. By spreading money between many loans, a fund is able to reduce the risk to the investor should any one company fail to pay. For a private individual, it would be almost impossible to obtain exposure to 20 or more loans without a very large pool of capital. In contrast, many money market funds allow investor entry with sums above 1,000 or 2,000.
Such funds are considered to be a very low risk home for savings. Money will – hopefully – earn more than in a bank account, though this may not be the case. The short-term nature of the loans means that inflation is less of a worry than it might be in other environments, though obviously, inflation hits lenders harder than the companies that are borrowing money – and in this instance, private investors are lenders. It is worth remembering that over the medium to long-term, inflation is always a worry to investors.
The low-risk nature of money market investing means that such funds ought to play a role in most portfolios. It should be considered as an asset class that helps diversify and provide property to rent in Malta some safety for the investor. However, over time, it would probably be a small asset class. Perhaps 10 or 15 percent of portfolio invested in money market funds as an asset allocation decision might be right. This would make up a part of the low risk holdings for a family or individual.