The Pros & Cons of Investing in the Money Market

Adam WongJanuary 20, 2015

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Photo credit: Jericho

The money market is a subsection of the fixed income market. The difference is that the money market specializes in very short-term debt securities (less than a year). If you’ve ever parked your money in a fixed deposit (certificates of deposits) at a bank, you’ve participated in the money market. The money market is also used by governments, institutions, and corporations to raise money in the short term.

Examples of money market instruments include:

Treasury bills – short-term debt securities issued by national governments
Certificates of deposits – a time deposit usually with a fixed interest rate and time period offered by banks and credit unions
Commercial paper – IOUs issued by corporations at a discount to face value
Eurodollars – a time deposit denominated in US dollars at banks outside the United States. It has no connection with the euro currency
Money market fund – a mutual fund that invests in money market instruments

The Pros

Very safe returns. Money market securities are considered extraordinarily safe. If you have no idea where to invest in other asset classes, you can consider parking your funds in money market securities while waiting for the right investment opportunity to come along.
Extremely liquid. Money market instruments are extremely liquid and can be converted into cash immediately.

The Cons

Very low returns. Because the money market is considered very low risk, it usually only gives a low single-digit return for investors.
Might lose out to inflation. If your money market instrument is giving you a 3% return and inflation is coming along at 4%, then you end up losing purchasing power each year.