How to Invest in Money Market Funds

Money market funds are not as widely known in Switzerland as some other investment solutions. This moneyland.ch answers the most important questions about this low-risk investment vehicle, and explains what to consider before you invest in it.

What is a money market fund?

Money market funds are investment funds that invest in the money market and in short-term, liquid securities. Examples include fixed deposits, as well as bonds with remaining bond terms of one year or less. Some money market funds are similar to bond funds in some respects, but bond funds also invest in long-term bonds and are normally riskier than money market funds.

Money market funds target investors who have surplus cash that they want to park somewhere for indefinite periods of time, and do not want to tie up the money in long-term investments. That makes money market funds an alternative to conventional savings accounts, fixed deposits, and medium-term notes. Investors can choose between money market funds denominated in a number of currencies, including the Swiss franc.

The returns you earn are closely aligned with market interest rates. If interest claims climb, the value of money market funds climbs with them. Distributing money market funds pass on the yields they earn from interest payments to you in the form of dividends. Accumulating money market funds reinvest the money back into the fund.

How secure are money market funds?

Although money market funds are not covered by bank depositor protection, they are considered a low-risk investment. That is because they only invest in short-term securities with a low risk of default. If your stock broker or other custodian bank goes bankrupt, you generally retain ownership over your fund shares, meaning they are normally protected from this risk.

Which costs apply to money market funds?

There are a number of costs that you should carefully look at before investing in a money market fund. The fund itself charges both ongoing fees, and possible one-time fees when you buy and/or when you sell your fund shares. On top of the fees charged by the fund, you also pay the brokerage fees and custody fees charged by your stock broker. Important: Some money market funds are only available at certain banks.

Which money market funds can I use?

There are several Swiss money market funds that are available to private investors.

Table 1: Swiss money market funds denominated in Swiss francs (sorted alphabetically)

Source: Fund managers. Date: November 6, 2024.

Table 1 lists all of the money market funds that are domiciled in Switzerland and denominated by the Swiss franc. Note that there are numerous money market funds denominated in foreign currencies like the US dollar and the euro that you can invest in through Swiss banks.

Are there any money market ETFs?

There are numerous exchange-traded funds (ETFs) that – like money market funds – can be used to invest in short-term money market instruments and securities. Most money market ETFs passively replicate money market or bond market indexes. Passively managed funds often have lower ongoing fees – which are shown as the total expense ratio (TER).

However, there currently are no money market ETFs that are denominated by the Swiss franc. Make sure to account for the possibility of currency exchange rate fluctuations when investing in ETFs denominated in foreign currencies.

In order to invest in ETFs, you first need to have a stock brokerage account with a bank or other stockbroker. The fees – including brokerage fees and custody fees – vary between stockbrokers. Comparing stockbrokers on moneyland.ch before settling on an account can save you money. You can find detailed tips in the step-by-step guide to choosing a stockbroker.

What are the disadvantages and risks of money market funds?

While money market funds generally have a very low risk of default, they also have negative aspects:

• Fees: The costs of money market funds can reduce your returns. In addition to the ongoing fund fees, your investment costs also include the brokerage fees and custody fees charged by the bank or other stockbroker. Some money market funds also have one-time fees (sales charges) that apply when you buy and/or sell fund shares. Altogether, these costs can be very substantial in relation to the returns. That is all the more so when you only invest in a money market fund for a short term, which is often the case.
• Losses are possible: Be aware that you can lose money if market interest rates are negative. During periods of negative rates, the performance of money market funds is normally also negative.

How do money market funds compare with other low-risk investment vehicles?

There are a number of similarities between savings accounts, fixed deposits, medium-term notes, and money market funds. All of these are low-risk investment solutions, and all of them yield relatively low returns. But there are also notable differences – with regards to the costs or access to your money, for example (see Table 2).

Money market funds are more diversified than other interest-based investments. That higher diversification results in a lower risk of losing money, for large amounts that would not be covered by bank depositor protection. If you hold more than 100,000 francs in savings accounts and fixed deposits from the same bank, you could lose a lot of money if the bank ever became insolvent.

Table 2: Comparison of savings accounts, fixed deposit accounts, medium-term notes, and money market funds

Theoretically, using money market funds can make sense in a time period when interest rates are climbing. Normally, the rising interest rates are immediately reflected in the fund’s share price. That sets money market funds apart from savings accounts, whose interest rates often lag behind the money market. However, you should always make sure to account for the investment costs when calculating your potential returns.

Because buying and selling money market fund shares typically costs money, a money market fund is not an optimal solution for financial reserves that you frequently dip into and replace (your emergency fund, for example). A savings account is more suitable for that purpose.

How profitable are money market funds?

Developments in the value of money market funds are closely correlated with the interest rate environment. The higher market interest rates are, the higher the returns from investments in money market funds will normally be. Table 3 shows the one-year, three-year, and five-year performance of the Swiss money market funds listed in Table 1. As Table 3 shows, money market funds generally are not an optimal investment vehicle for long investment terms.

Table 3: Performance comparison of Swiss money market funds

Source: Fund managers and Swissfunddata.ch. Cumulative performance in CHF. Ongoing fund fees are accounted for. One-time fund fees and stockbroker fees (brokerage and custody fees) are not accounted for. Dates used for performance comparison: November 6, 2019. November 6, 2023. November 6, 2024.

Does investing in money market funds pay off?

Money market funds are primarily useful for short investment terms. If you have capital that you want to keep invested for long periods of time, then using diversified stock ETFs can potentially yield much higher returns – in spite of the higher risk.

But even for short investment terms, there are other investment solutions that are normally more suitable than money market funds. That is because the combined costs are relatively high, when you account for the fees charged by the fund itself and those charged by the bank or other stockbroker. If you have cash that you would like to “park” or invest over short terms, then other interest-based investment vehicles are normally more suitable.

Savings accounts normally do not have ongoing account fees, and the interest rates offered by some banks can be higher than the returns you get from some money market funds. Fixed deposit accounts and medium-term notes are also worth considering, if you are willing to leave your money tied up for a fixed period of time. You can find the best offers by comparing savings accounts, fixed deposits, and medium-term notes on moneyland.ch.

Note: This article is provided for informational purposes only, and should not be considered investment advice. The publishers do not accept any liability in connection with this article.

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