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Money Market Funds – How They Work

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If you’re new to investing, money market funds are a good place to start your investor journey! When it comes to mutual funds, they have the lowest risk levels and are relatively easy to get started with. That’s why we’re going to tell you all about it so you can get started.

What is the money market?

To explain better we need to understand a term used by investors; liquidity. Now, think of investments on a scale of a bucket of zero-degree ice to a bucket of water. If you are thirsty, you would go for the most liquid option. This can be a bottle of water or melting ice. In essence, a highly liquid investment can be easily converted to cash to satisfy your thirst for money.

Against that background, the money market transacts in highly liquid instruments. Given their liquid nature, they are so close to money hence their name. Instruments traded in this market include treasury bills and commercial papers. Two common factors to these instruments are they’re short-term and low-risk in nature.

Money market funds

These are mutual funds that help invest your cash in the money market. Here’s a brief reminder of the good work mutual funds do. They break heavy investments into purchasable units. For example, a $10 million investment broken down into units of $100. That way, more people can access investments. Think of them as the democratic structure of the investment world.

Henry B. R. Brown invented money market funds in 1969

The New York Times

Back in the 1960s, the average American could not access commercial papers and similar instruments. Then, the minimum requirement ran into hundreds of thousands of dollars. In August 1969, Mr Brown invented a solution that will not only change this for Americans but millions of micro-investors around the world. This solution has grown from a $250,000 industry to one valued at trillions of dollars. At Cowrywise, we have kept Brown’s spirit alive by making it easier for more to invest by retailing mutual funds.

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How do mutual funds earn returns?

As stated earlier, these funds invest in a basket of low-risk instruments. Though returns are variable, your capital is safe from the volatility that comes with instruments that have higher risks. Daily, your returns accrue on your available balance.

To understand this better, assume the rate is fixed at 10% per annum. Every day, you will earn a daily breakdown of that. This is around 0.028% per day. Hence, if you put ₦30,000 into the fund today, you’ll earn that daily rate per day. And if you go on to add ₦10,000 two days after, you’ll start earning the daily rate on ₦40,000. If you top up or withdraw by selling some units, the same flow applies.

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The accumulated returns are then paid out at an agreed interval. So, even if you withdraw your entire capital the returns earned so far will still be paid to you. This interval can be monthly, quarterly and so on. For money market funds on Cowrywise, returns get paid out quarterly. Sounds like a good way to build side cash.

If you already have an account, sign in and start investing.

Money market funds invest in a basket of low-risk instruments

How to invest in money market in Nigeria

You have the alternative of filling out long forms and emailing your fund manager for updates. On the other hand, you can use Cowrywise and track your growth daily with the app. We bet you love the latter. Start now:

  • Get the Cowrywise app and signup here
  • Tap invest in mutual funds
  • Take the assessment test
  • Look out for the funds with “low-risk” badges. Those are money market funds

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