Contextualizing the Risks of Money Markets

Over the years, money market funds have been the safest means of investing some cash for a long term portfolio entry or for those who want a safe place to hold their money. But recent global developments, with the world economy sagging on its knees, experts have started to point out that there are risks in money markets too. This has shed the previous thoughtline that money markets are a risk-free investment avenue. You can no longer hold it for granted that your investment is safe, just because you are in the money markets. In fact, the US Securities and Exchange Commission (SEC) decrees that while investor losses entrusted to money market funds are rare, they are very possible.

However, just as they have become risky to an extent, they have also gained on the rate of interests and profits over the last one decade. Contemporary money markets can triple your initial capital within a few years, and give an impetus to real wealth. Similarly though, just as they are profitable, they can wreck you financially in just a few hours of mishap. It is wise therefore, that before you load your cash into money markets you ensure that you know not only what they are but also how they work. This will facilitate you to know which money market risks to take and which ones are too dear or foolish to take.

Let us begin by understanding what money markets refer to, as a concept. Simply said, money market funds are invested mutual funds that are held not in real estate or other avenues but in currencies. The currency markets are what we refer to as money markets. A good way of visualizing this is by contemplating on how investors buy some stocks and sell others in the stock market. In the same way, investors buy various currencies of the many nations of the world at low prices and sell them when the price is high in the money markets. These transactions are not risk free, for there are indeed some money market risks that develop in between the buying and selling.

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Money markets funds take your money and invest it according to their expertise opinion. When profits accrue from the collective investment, they give you a particular portion of that earning in form of dividends, monthly, biannually or annually, according to your agreement. Most money market funds allocate the large part of their funds to short term market instruments with a maturity of less than a year at the maximum. The short time-frame is a measure of reducing risks. In many countries, the average investment maturity of money market fund entries must be about 90 days or less.

That same principle accrues when individuals are in the money markets themselves and not represented by funds. The principle that guides this element of money market risks is that, the longer one loans out money to another nation or even to somebody, the higher the risk that something will happen during the duration to make it impossible for them to pay back. By buying currencies, you are loaning out your money and by selling them, you are getting it back plus interests.

The nature of risks in money markets is of three types. To begin with, if your money has been entrusted to a money market fund, or if you have purchased the currency yourself, either way any price fluctuation in the market is not insured. If a country is attacked and war builds up, the currency you had will fall to ungraceful levels, causing you heartaches forever. The value of your investment can fall within hours.

[ad#downcont]This presents the risk of liquidity, whereby, at that particular time, the currencies have no market and you can not transfer your funds to a different investment as fast as would be necessary. Secondly, inflation accrues over time, whereby the returns on your investment become less and less, as the value of your initial investment diminishes.  A share in a money market acts like a security and there is no guarantee that the share price for that fund will not go down, thereby reducing your returns at the close of every month. If for instance you joined the fund with $6 per share, if the share price gets to $2, your investment will only earn a third of the original returns.

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At the overall though, when compared to CD’s, classic savings accounts, and short-term bonds, money markets are safer and more solid for a long term investment.