Money market funds have become very popular alternative to bank deposit

A money market fund is a type of unit trust that invests in interest-bearing instruments issued by banks, government and companies when they want to borrow money.

These short-term instruments are

• traded on the money market, and
• have a maturity of less than 12 months.

Money market funds have major advantages in comparison with other cash investments.  For example:

• You gain access to money market instruments even though you invest only a small amount.
• The interest rate is higher than for a bank deposit, as you are part of a group that can bargain for the best wholesale rates.
• You can withdraw your money at any time, like a call deposit at a bank.
• Interest rate risk is largely eliminated because money market funds are allowed to invest only in instruments with an average term of not more than 90 days.

Units in a money market fund have a fixed value of $1, and the only changing aspect is the interest income an investor earns on that unit.

This income is capitalised, or reinvested, which means the investor earns interest on interest.

Money market funds are ideal

• for pensioners who must live on their interest income or
• for the creation of an emergency fund from which you can withdraw money at any time. 

Money market funds also provide useful parking for investors

• to limit the risk of an investment portfolio in uncertain times or
• to phase in their funds.

When you invest in a money market acount, you should know the difference between the nominal and effective rate. 

• The effective rate is the interest rate you will earn if your money is deposited for the whole year and all the interest is reinvested. 
• The nominal rate is lower because this is the rate you earn every month before any reinvestment of interest is taken into account.