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As money market mutual fund returns hit their highest levels in more than a decade, some investors are pouring into the asset class. In the week ending October 19, one of the main indicators of money market funds as a whole is showing the highest growth in decades, according to Refinitiv Lipper data: in the week ended October 19, retail money market inflows reached $122.1 billion, which is highest since 1992. In general, the market is experiencing an outflow of funds driven by institutional investors: up to October 19, $189.5 billion was withdrawn from US money market funds. This is the largest net churn in any full year since 2010, according to Refinitiv Lipper. However, retail funds are attractive because they are seeing huge increases in returns as the Federal Reserve raises interest rates to bring down high inflation. According to Crane Data, a firm that tracks money markets, these accounts averaged 0.02% at the beginning of the year. Now the average return is 2.8% and continues to rise, reaching levels not seen since 2007, on the eve of the Great Financial Crisis. “Without a doubt, they will rise by an average of 3% within two weeks,” said Peter Crane, the founder of the firm, adding that they could rise by an average of 4% by the end of the year with little market risk. “Anyone who buys 2-year Treasuries at 4% a month ago will probably regret it,” he said. Why Retail Investors Buy Money Market Mutual Funds Market volatility, which has resulted in negative returns for both stocks and bonds since the beginning of the year, has led many investors to seek safety. The S&P 500 is still in a bear market, down almost 19% in 2022. At the same time, bond yields, which usually offset market volatility, are not much better. In recent weeks, yields have risen enough to be attractive. The yield on 2-year US Treasury bonds is now above 4.4% compared to less than 1% at the beginning of the year. Bond yields vary inversely with prices. These indicators make assets with any profit more attractive. Money market mutual funds provide investors with safety, making them a safe place to store cash. “Over the past couple of months, we have seen not only institutions, but also retail investors, place money in the money markets to avoid volatility in the stock and bond markets,” said Mark Hackett, head of investment research at Nationwide’s investment management group. , adding that he usually views such data as a barometer of stock and bond concerns. “It was absolutely justified for most of this year.” However, now that short-term bond fund yields are rising, it makes sense for many investors to invest in short-term bonds, he added. In addition, while market losses may be hard for investors to bear, many stocks are currently trading at a huge discount, which means that now is a good time to buy riskier assets. When they make sense to investors. Most financial advisors recommend holding cash in money market mutual funds only for certain categories of retail investors—those who do not accept very low risk or who need to keep cash on hand for short-term use. “If you’re incredibly risk sensitive, meaning you can’t lose money either emotionally or financially, money markets make a lot of sense,” Hackett said. It could make sense for people on a fixed income, like retirees, he says. Liquidity is also an advantage for funds. Having some money in a money market fund also makes sense if you’re expecting a big purchase like a house, a car, or paying for a child’s college tuition in the near future. “It’s not an investment, it’s just a retention scheme,” said Steve Azoury, founder of Azoury Financial. It is also a good place to keep your reserve fund. Financial advisors generally recommend having three to six months worth of cash on hand. “It will pay a higher rate than a checking or savings account,” Azuri said. He added that investors should also be aware that not all money market mutual funds are FDIC insured, unlike checking and savings accounts or money market deposit accounts. Consider Fees Of course, while money market mutual fund returns are on the rise, they are still not keeping up with inflation, which rose 8.2% year-over-year, according to the September CPI report. However, Crane notes that inflation reduces the return on all investments because it reduces purchasing power. A more worrisome blow to the higher returns of money market funds are fees, which rise as returns rise. In low-yielding environments, such as in the years following the Great Financial Crisis and just after the coronavirus pandemic, asset managers have eliminated commissions on money market funds to prevent investors from receiving negative returns even if returns and returns were lower for managers. From 2006 to 2021, advisers waived nearly $58 billion in money market fund spending, according to a March report from the Investment Company Institute. But as the returns of such funds grow, the fees come back and can range from 0.1% to over 1%. These fees amount to billions of dollars for money managers from investors. In the quarter ended Sept. 30, Charles Schwab reported $132 million in income from money market funds. A year earlier, they waived $83 million in fees, reporting only $29 million in fund revenue.
Credit: www.cnbc.com /