A money market fund is a type of mutual fund that’s a common investment of choice for investors looking for a short-term, low-risk return.
One of the defining characteristics of a money market fund is that they typically focus on highly liquid securities, like cash funds, treasury bills, and bonds. That means they can be changed back into cash quickly, hence the short-term nature.
Though they don’t tend to give you very high returns, a money market fund is also considered to be relatively low risk, making them an important part of many diversified portfolios.
Here’s everything you need to know before investing in a Canadian money market fund.
- What is a money market fund?
- Money market fund pros and cons
- How to invest in a money market fund
- Money market funds offered by the big banks
- Money market fund alternatives
- FAQ
What is a Canadian money market fund?
A money market fund is a type of mutual fund that holds investments for shorter periods of time than a traditional mutual fund or ETF.
When people want short-term savings, they can also turn to GICs or high interest savings accounts… but money market funds often outperform these 2 other savings vehicles.
That said, money market funds do have risk inherent to them, but they aren’t considered as risky as other investments (like stocks).
Preservation of capital is what it’s all about – and it’s done by holding lower risk investments, such as:
- Bankers’ acceptances: A payment that’s guaranteed by a bank after a certain amount of time.
- Commercial paper: A security sold by large corporations paid out at a specified maturity date.
- Federal or Provincial bonds or notes: A contract issued by the government.
- Treasury bills: A short-term security backed by the U.S. treasury.
The interest earned on a money market fund is typically taxed, but you can take advantage of tax benefits if you open your fund in a registered RRSP or TFSA account.
How does a money market fund work?
A money market fund works a lot like a mutual fund – investors pool their money together to buy fixed income assets. But there are differences to mutual funds as well…
With a money market fund, monthly payouts can occur in the form of dividends. These payouts occur when the price of the fund rises above its Net Asset Value (or NAV). Because money market funds aim to preserve capital, they typically have a set unit value rounded to the dollar.
With a Canadian money market fund, typically this price is either at $1 or $10 per unit. If the price rises above the fixed amount, the holders are paid out accordingly to the amount it has grown per unit.
Now the opposite can occur when the price per share dips below the NAV – which is called “breaking the buck.”
This is a rare event when the fund’s investment income doesn’t cover the expenses to run it. In this event, investors may lose part of their investment. Again, it’s rare, but it can happen.
This event also signals a greater economic distress because these funds are considered close to being risk-free.
Money market fund pros and cons
Below is a list of the potential ups and downs to investing in a Canadian money market fund.
5 pros of money market funds
There are 5 main points that make money market funds attractive.
1. Highly liquid
Because money market funds are held for short periods of time, the maturity dates on them are short (up to 12 months).
When selling a money market fund, it’s fairly straightforward with access to your funds within days of selling.
2. Lower risk
Because most of the investments held within a money market fund are typically government securities or larger corporations, the idea that their value will drop is possible, but unlikely.
In most cases they earn money for the unit holder.
3. Stable
Money market funds are a good addition to tax sheltered registered accounts, providing a fixed-income investment.
As part of your fixed-income portion, they can also add some diversity in the investments they hold.
4. Interest rates
There’s the potential to earn higher interest rates on money market funds vs. parking the cash inside a savings account.
There are other fees that may eat into these extra earnings, so it’s important to examine any fees you may pay upon selling. If the increased earnings are substantial enough, it’s likely these fees will be more than worth it.
5. Dividends
Money market funds can pay a monthly dividend, which can be a super convenient way to earn cash or reinvest your earnings within your investment.
Just note that this dividend can be taxed if you hold it outside a registered tax sheltered account.
3 cons of money market funds
There are some drawbacks to money market funds as well, making alternatives more appealing in the long run.
1. Low risk means low reward
Because money market funds are lower risk, the interest you earn on them is lower as well.
Think of them as another way of adding fixed-income assets to your investment portfolio.
2. Management fees
Some money market funds have management fees associated with them (which is typical for mutual funds or ETFs as well), ultimately eating into your earnings.
Always understand what fees are associated with any investment you make.
3. High minimum investment
Some types of money market funds have investment minimums you’ll need to keep in mind.
This minimum can be anywhere from $100 and all the way up to $3,000 – putting them out of range for beginner investors.
How to invest in a money market fund
There are several ways to invest in a money market fund, for both the institutional and DIY investor. The choice on how you invest is 100% up to you.
Investing with a financial advisor
If choosing to invest with a financial advisor, the good news is you have someone who can help steer your needs and ensure you have the right balance of assets in your portfolio.
There are things you should watch for, including any hidden fees that will cut into your investment. These fees should be spelled out clearly before purchasing a money market fund.
Investing with a big bank broker
The large Canadian banks also have advisors on staff that can help you select the right investments for you. Again, heed caution to any hidden fees involved with money market funds.
All of the larger banks offer money market funds and it’s best to talk to your account manager to see which fund is best for you.
You can also buy into money market funds yourself using a big bank online broker, like CIBC Investor’s Edge. You can learn more about this product here:
This online investment brokerage is owned and run by CIBC, and is targeted towards people who are interested in managing their own investments, learning about how to manage their own investments, and people who do investment management for a living. With relatively low fees for trades, and discounts for students and active traders, this is a service worth looking into.
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- TFSA
- RRSP
- RESP
- RRIF
- LRSP
- PRIF
- LIRA
- LRIF
- Cash
- Margin
- Corporate
- Partnership
- Formal trust
- Investment club
- Estate
- FHSA
- Stocks
- ETFs
- Options
- Mutual Funds
- GICs
- Fixed Income
- Precious Metals
- Structured Notes
- IPOs
- CDRs
Investing with a discount broker
When using a discount broker, you’re really relying on your own research and selection of money market funds.
Because you do the leg work, there aren’t any hidden fees, but do be cautious of the fees (MERs) you pay with them.
Overall though, it can be much cheaper to use a discount broker, and if going this route, it’s good to have a plan for how long you will own your money market fund.
Questrade is a good example of a discount broker, offering some of the cheapest fees on the market:
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Money market funds offered by the big banks
Each of the big Canadian banks offer money market funds as both mutual funds as well as individual money market products (like government treasury bills and bankers’ acceptances).
Below is a chart with specifically money market funds that are available to investors. Keep in mind that the numbers reflect the more standard money market funds, but most banks also offer “premium” versions (for $100,000+) as well as U.S. Dollar funds.
| Bank name | Minimum investments | Minimum subsequent investment | MER | 1 year return | Return since inception |
|---|---|---|---|---|---|
| Scotiabank | $500 | $25 | 0.18% | 0.1% | 2.4% |
| BMO | $500 | $50 | 0.21% | 0.07% | 2.73% |
| CIBC | $500 | $25 | 0.2% | 0.1% | 2.9% |
| TD | $100 | $0 | 0.19% | 0.14% | 3.11% |
| RBC | $500 | $25 | 0.19% | 0.1% | 3.3% |
Want a quick comparison between these big bank offerings?
Here’s how they compare based on their current 1 year returns, as of May 11, 2022:
And again for their return since inception:
Though the past year has been a bit rocky for many of the banks, RBC still boasts the highest return since inception – making it a tempting offer.
Let’s take a look at each fund more closely.
Scotiabank money market funds
The Scotia Money Market Fund Series A is one of a handful of money market funds offered by the big bank.
With an inception date of August 30, 1990, this money market fund has been around for a while and boasts a $10 NAV. You’ll get income distributed monthly, with the 0.01% going out in 2021.
One of the best parts of the Scotiabank money market fund is that it has the lowest MER of the funds listed here at 0.18%.
You can learn more about Scotiabank’s money market funds here.
BMO money market funds
BMO offers 2 types of standard money market funds (Series A and Series M) that have a minimum initial investment of $500 and a minimum additional investment of $50.
Since inception in 1988, it has earned 2.73%, and (like all other money market funds) the goal is to be highly liquid and create interest income.
Currently, its MER is at a standard 0.21% – the highest of the other money market funds listed here (though not by much).
Like Scotiabank, this BMO fund also distributed dividends monthly, with a current yield of an impressive 0.31%.
You can see more info here.
CIBC money market funds
CIBC is another one of Canada’s big banks to offer money market funds. For a $500 minimum investment and minimum monthly contributions of $25, investors can take advantage of this low risk fund.
The fund is priced at a NAV of $10, and like most in its category, is meant to preserve capital and maintain liquidity by investing in mainly high quality short-term debt securities.
If you have more than $100,000 to invest, you can choose the Premium Class version of the fund instead.
Click here to learn more.
TD money market funds
TD offers a few choices for money market funds with a minimum investment of $100 and a $0 minimum for subsequent investments (though setting up pre-authorized payment plans requires a minimum of $25).
They claim that the large proportion of high-quality corporate investments enables them to deliver higher short-term results relative to their competition. The MER currently sits at 0.19%.
Get more info here.
RBC money market funds
RBC offers a money market fund that, like TD’s, seeks somewhat higher current income than those focused on being invested solely in short term government securities.
The fund is priced at $10 per unit, with a minimum investment of $500 and subsequent investments of $25.
Learn more here.
Money market fund alternatives
There are other options besides money market funds that are also low risk in nature and may suit your needs as well.
High interest savings accounts, money market accounts, and short term bonds are a few other low-risk options – so let’s take a closer look.
Money market fund vs. money market account
The first thing to note about money market accounts is that they aren’t the same as a money market fund – and they’re much more popular in the United States than they are in Canada.
In fact, I can’t find a financial institution that offers them in Canada, but wanted to include it since they’re so easily mixed up.
A money market account has similar features to a savings account but offers some chequing account options. Usually it comes with a debit card, with a set amount of transactions each month.
Think of it as a variation to a regular savings account, but with the potential to earn a slightly higher interest rate on your money.
Money market fund vs. high interest savings accounts
High interest savings accounts offer higher interest rates combined with the liquidity of money market funds. They’re also backed by the Canada Deposit Insurance Corporation (CDIC) in most cases, which means your investments are insured up to $100,000.
But even the “high rate” savings accounts only offer in the range of 1.5% – 2.5%. With the markets being a bit on the low side nowadays, this is actually pretty decent compared to a typical money market fund return.
But most of the time, Canadian money market funds outperform savings accounts.
The upside for savings accounts is it’s entirely liquid, since it’s cash. That means you get even more flexibility than your money market fund offers, with sometimes similar return.
Want to check out some of the best savings accounts in Canada? Here are some of the highest-rated options today:
Money market fund vs. short-term bonds
Another alternative to a money market fund is a short-term bond.
Issued by a government or corporations, a bond allows investors to loan their money to the issuer. Bonds carry slightly more risk to money market funds, but they can have higher interest rates and potentially less fees associated with them (depending on who issues the bonds).
Are you thinking about investing in a money market fund?
Are money market funds for you?
How do money market funds fit into the fixed asset portion of your investment account? Do they even factor at all?
Let us know in the comments below.
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$25 GeniusCash + Delicious meal choices with fresh ingredients + Front-door delivery.FAQ
What is a money market fund?
Money market funds are a type of investment meant to be held for shorter periods of time than a traditional mutual fund or ETF. They do have risk inherent to them, but they aren’t considered as risky as other investments like stocks. Preservation of capital is what it’s all about.
How do money market funds work?
Money market funds seek to keep your initial investment intact and make a bit more on top of it. To do this, the funds hold lower risk bankers’ acceptances, commercial paper, Federal or Provincial bonds or notes, and treasury bills. You can invest in a money market fund through your broker, either online, independent, or from a big bank.
Can you lose money in a money market fund?
Yes, you can lose money on a money market fund, but it is a rare event (called “breaking the buck“) and signals a bigger issue within the financial markets.
Is a money market fund the same as a money market account?
A money market account is different from a money market fund. A money market fund is an investment you can hold within your registered retirement account, where a money market account for all intent and purposes is a higher interest savings account. You can learn more about money market fund alternatives here.
Is a money market fund a mutual fund?
Yes, a money market fund is a type of mutual fund that specializes in highly liquid, low risk, and short term investments. When looking to trade money market funds with an online broker, you’ll likely find them in the “mutual fund” section of the software.
Who should invest in a money market fund?
Anyone seeking to preserve their initial investment capital within a low risk, short term capacity should consider a money market fund. Again, the investment isn’t completely risk-free but is close. Are the gains on your investment going to be big? Likely not, but your money should be safe for the short term.
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