Money market funds: are they a good alternative for your investments?

In recent months, money market funds have gained great prominence among savers who are looking for new ways to protect their money without taking on major risks. In a context of high interest rates and persistent inflation, these investment options promise to offer a higher return than leaving money idle in a current account.

However, are they really a solid alternative for your investments? Let’s find out in detail.

What is a money market fund?

A money market fund is a type of investment fund that mainly invests in short-term fixed-income assets. Common examples include Treasury bills, commercial paper, or bank deposits.

The main goal of this type of investment is not to achieve high returns, but rather to preserve capital and offer near-immediate liquidity. In short, these funds aim to provide the investor with moderate but stable profitability and quick access to their money.

These funds are usually managed by financial institutions that select instruments with short maturities, typically under 12 months, and low credit risk.

How do money market funds work?

The functioning of money market funds is simple: investors buy shares of the fund, and the manager invests that money in short-term financial instruments.

What happens next? Each day, the value of those shares may slightly rise or fall depending on how interest rates evolve and how the fund’s underlying assets perform.

In general, money market funds:

• Take advantage of rising interest rates to offer higher short-term returns.
• Continuously reinvest in new assets, keeping duration risk low.
• Allow easy withdrawal of money, making them attractive for investors seeking liquidity.

Another point to highlight is that, according to the Spanish National Securities Market Commission (CNMV), this is considered a low-risk investment (1 or 2 out of 7), although they are not completely free from potential losses. After all, we must remember that there are no risk-free investments.

Current profitability: how much can you earn?

The profitability of a money market fund depends mainly on official interest rates. In 2024, with the Euribor close to 4%, many European money market funds offered between 2.5% and 3.5% annually, although these figures vary and must always be evaluated according to market conditions, which can change from one year to another.

Because of this, it is important to keep two things in mind:

• They do not guarantee the capital, although losses are usually minimal.
• Returns do not always outpace inflation, meaning purchasing power can still decline if prices grow faster than the fund’s yield.

Advantages of money market funds

1. High liquidity – You can access your money almost at any time.
2. Low volatility – Their value fluctuates little compared to other fixed or variable income funds.
3. Alternative to savings accounts – They offer similar or even higher returns without the limits of amount or term.
4. Good option in times of economic uncertainty – They serve as a “safe haven” while you decide on a longer-term investment strategy.

Drawbacks or risks to consider

1. Limited profitability – If interest rates fall, the fund’s returns will quickly drop.
2. Not guaranteed – Unlike bank deposits, money market funds are not covered by the Deposit Guarantee Fund.
3. Inflation risk – Even if the nominal value is maintained, the real value of money may decrease if prices rise.
4. Taxation – Capital gains are taxed as investment income, although they can be deferred if reinvested between funds (a process known as a tax transfer).

Money market funds vs. other investment alternatives

When an investor seeks security and moderate returns, money market funds become one of the most popular options. However, this is not the only alternative.

There are products that combine higher potential returns with low risk, such as invoice advances or promissory note discounting between solvent companies, where capital is used to directly finance the real economy.

At Inversa, we offer an alternative financing model where individuals can invest in short-term business operations backed by commercial documentation, with maturities ranging from 30 to 180 days.

Thanks to this type of investment, it is possible to diversify and obtain a return that can exceed that of many money market funds, while keeping risk under control.

Are money market funds a good alternative for you?

Money market funds can be a useful tool within a diversified strategy, especially to:

• Maintain liquidity while waiting for an investment opportunity.
• Reduce the overall volatility of your portfolio.
• Temporarily shelter your capital during uncertain market conditions.

But if your goal is to achieve higher profitability without taking on major risks, it may be worth exploring short-term alternative investments, such as those offered by Inversa, which connect private savings with responsible business financing.

Money market funds are a solid option for protecting capital and maintaining liquidity, but their returns are limited by interest rates.

In contrast, platforms like Inversa allow investors to participate in real and profitable operations with transparent management and short maturities, offering a balance between safety, profitability, and economic purpose. If you want to learn how these opportunities work, don’t hesitate to contact us and start diversifying your money wisely.