What are money market funds and what risks do they harbour?

Money market funds are investment funds that invest primarily in short-term, highly liquid and secure financial instruments. These include money market instruments, short-term corporate bonds and bank deposits. They are suitable for investors who want flexibility and a return at the same time, as they are broadly diversified and invest in highly liquid financial instruments.

Although money market funds are strictly regulated and aim to preserve capital and provide daily liquidity (such as the Goldman Sachs Euro Liquid Reserves Fund, which has always achieved its objectives since 1999), losses can never be completely ruled out. The biggest risks are credit risk and liquidity risk. Credit risk is when the default of a counterparty or issuer of an asset held in the portfolio has a negative impact on the portfolio. Liquidity risk arises when no party can be found that is willing to buy an asset that the portfolio wishes to sell, which could affect the portfolio’s ability to fulfil redemption requests.