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Is it worth continuing to invest in Money Market Funds?

GoWealth14 Feb 2025

Is it worth continuing to invest in a money market fund💰 with an annualized return of 5️⃣%1🤔❓

Since 2022, the Federal Reserve has raised interest rates continuously📈, and the FED rate has peaked and remained high2. Money market funds have become one of the most direct and fast-earning investment products🤩:
  1. Relatively attractive returns💰: As of 31 December 2024, the average 1-year return of USD Money Market Funds was 5.06%, and the average 1-year return of HKD Money Market Funds was 4.07%3;
  2. Investment subscription remains popular🎉: according to website of Federal Bank of St Louis, as of 30 September 2024, the global AUM of USD Money Market Fund exceeded USD 6.8 trillion, which observed an 80% increase in five years4; a report from Hong Kong Investment Funds Association also indicates that, the AUM of Money Market Funds registered in Hong Kong surged nearly 4 times from USD 8,438 million at the end of 2020 to USD 39,918 million in September 20245.
The prospect of a rate cut temporarily remains uncertain. Is it worth continuing investment in Money Market Funds❓ Any tips to pick from various Money Market Funds in the market❓Chart 1: United States Fed Funds Interest Rate (since 2020)MMF_IMG1.pngSource: tradingeconomics.com/united-states/interest-rateChart 2: Asset under management of USD Money Market funds (since 2020)MMF_IMG2.pngSource: fred.stlouisfed.org

🔶How do Money Market Funds earn return❓

Money Market Funds usually invest in financial products with short maturities, such as government bonds, corporate short-term bonds, bank deposits, bills and other fixed income products.Take USD Money Market Funds as an example, the interest rate of closely follows the FED interest rate in principle. The FED interest rate hike means that the interest on deposits and certificates of deposit in US banks will rise, meanwhile potentially more funding inflows shift from long-term fixed-income assets to short-term fixed-income assets, hence investment in bank deposits and certificates of deposit in US dollar Money Market Funds will "rise" accordingly, which makes it one of the most directly benefiting income products from interest rate hikes.Chart 3: Impact of FED interest rate hike on Money Market Funds6MMF_IMG3_EN.pngSource: tradingeconomics.com/united-states/interest-rate, Morningstar

🔶How long may the return of Money Market Fund last during the rate cut cycle❓
Referring to the data:

  1. The latest US employment data (as of December 2024) exceeded expectations: non-farm employment was 256,000, far exceeding the expected 160,000. The unemployment rate was originally expected to remain at 4.2%, but it dropped to 4.1%. This data supports the expectation that the Federal Reserve may slow down the pace of interest rate cuts. As of 31 January 2025, the Federal Reserve Interest Rate Observation Tool (CME) predicts that the Fed interest rate will fall at the level of 4.00%-4.25% with probability of more than 50% in early November 2025 (see Chart 4).
  2. Review of the interest rate cut cycle after 2000: In the early stage of the interest rate cut, the AUM of USD Money Market Fund remained for a long time. Until FED interest rate cut cycle entered the second half, funds flowed out of Money Market Fund (see Chart 5).
  3. US has experienced seven interest rate cut cycles in history, and the average time of the interest rate cut cycle is as long as 26 months.
Chart 4: Federal Reserve Interest Rate Monitoring Tool (CME) predicts FED interest rates (2025-2026)MMF_IMG4.pngSource: cmegroup.com/markets/interest-rates/cme-fedwatch-tool.htmlChart 5: Comparison of FED rate changes and the AUM of USD Money Market Fund (since 2000)MMF_IMG5.pngSource: fred.stlouisfed.org

🔶There are so many money market funds on the market. How should I pick one❓

  1. When choosing a Fund House, pay attention to branding, strength, and global investment experience.
  2. Money Market Fund’s asset under management (AUM): Moderately-sized Money Market Funds have obvious advantages in balancing liquidity as well as flexibility in income generation;
  3. Fund’s fees and charges: Be aware of subscription fees, management fees, etc.

🔶How to search for Money Market Funds in WeLab Bank APP❓

1.Log on to WeLab Bank APP and click ‘Featured Fund’MMFScreen_S_EN1.png2.Select ‘Money Market’MMFScreen_S_EN2.png3.Money Market Fund ListMMFScreen_S_EN3.png4.Select one of the funds to view the detailsMMFScreen_S_EN4.pngRemark:
  1. Take USD Money Market Funds as example, data as of 31 December 2024, in Hong Kong retail fund market, we calculate the average of the returns of all USD Money Market Funds in the past 1 Information provided by the Fund House(s) and Morningstar Asia Limited.
  2. Source: tradingeconomics.com/united-states/interest-rate
  3. Regarding HKD Money Market Funds, data as of 31 December 2024, we calculate the average of the returns of all HKD Money Market Funds in the past 1 year in the Hong Kong retail fund market. Information provided by the fund company, Morningstar Asia Limited.
  4. Source: fred.stlouisfed.org
  5. Source: hkifa.org.hk/zh-hant/retail-funds/fund-statistics/
  6. Source of information: See remarks 1,2
  7. Source: www.visualcapitalist.com/sp/what-history-reveals-about-interest-rate-cuts/
Want to search and invest in related funds?Open the WeLab Bank App and click【Featured Funds】to find out more!
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