Money Market Risks
May 2nd, 2007 by admin
Money markets are mutual funds being invested in the money markets. Money market is also referred to as a financial market used to give short-term and long-term borrowing and lending. Usually, money market terms will last up to thirteen months. Many people are attracted with the concept of putting their money on the money market because of a better return of investment out of their money. However, with each investment, there is also a risk involved in the process. Most of these risks can be seen as the individual plans to allow his or her money to stay invested in the money market for a longer period of time.
The first risk involved in money market is the money market rate being used. The value used for the money market rate is indefinite. Meaning, the value may go up or down. There are instances that the money market rate used is higher on the previous month and lower the next month or vice-versa. Because of this movement in the rate being used, your expected earning each month may vary as well. There is no assurance how much money your investment will earn on a monthly basis. A related risk is associated with the money market rate risk called the income risk.
Another risk in money market is inflation. Some people tend to place their money market funds into investment for longer periods of time since this type of investment is considered safer compared to other investments like the stock market. However, some money market investors fail to realize that inflation could affect the investment return if the money is placed in the money market for a long period of time. Investors should take into consideration that as the value of inflation increases, the value of the money market fund would decrease.
Another risk is called credit risk. This is the kind of risk that happens when the security issuer fails to have the principal or payment of interest created in due time. This condition occurs when security of the money market defaults or its credit rating downgrades. This condition is a rare case since money market funds should invest on securities with high quality. Even if one of the securities of the money market downgraded, the effect is minimal since money markets are invested on hundreds of securities. Still, even if this risk is rare, the possibility of this scenario should not be treated as if it is impossible to happen.
The last risk associated with money market is called management risk. This type of risk is linked with the management’s assessment of companies for the securities of the money market fund. Even in a scenario of a growing market, there are still instances that the assessment by the management on the security is wrong. On these instances, the fund may have losses or poor performance.
Because of the following risks, money market funds should not be considered as a risk-free kind of investment. Investors should still do their part to research carefully on the money market they plan to invest their money into.