What is in a money market fund? Not what you'd expect, if you are used to saving your money in a 30 or 60-day call or locked up in one, two, or five-year fixed deposits. Consider these differences below between the two investment vehicles (see table below).

So, if money market funds are not like fixed deposits, how exactly do they produce a rate of return?

Each money market fund starts out with a legal and securities approved investment structure formation, generally an investment trust. Within that formation spelled out in full disclosure in the investment prospectus, the fund must spell out the intent, the investment policy statement, the portfolio managers experience, the types of securities, the fees to buy, sell, administer, the tax implications, the prohibitions against certain types of structures, the risk inherent in investing, the legal team, the board of directors, and the auditors.

Once funds begin to flow into the fund, the cash is used to purchase the securities stipulated in the investment policy statement asset allocation section. All money market funds share one trait: the underlying securities must mature in 270 days or less. Money market funds use various combinations of the following:

• Treasury bills

• Commercial paper

• Bankers' acceptances

• Certificates of deposit

• Federal funds, and short-lived mortgage and asset-backed securities

Everyone is familiar with Treasury bills, which if US dollar denominated are very short-term US dollar government bonds.

Commercial paper is another name for very short-term debt, so called because it is literally put together on paper. Commercial paper actually is unsecured promissory notes issued by large corporations and financial institutions with a fixed maturity of one to 270 days. The security pledges behind the commercial paper may be credit card debt receivables, auto loans, residential mortgages, and mortgage-backed assets. The securities are usually sold at a discount from face value to be received at maturity. This discount determines the return that will be earned. Some of this may be sounding very familiar now.

Banker acceptances are somewhat like a post-dated cheque, say for six months into the future. The bank agrees upfront to accept the cheque, and tender the cash. In doing so, the acceptances become a liquid asset that can be traded in capital markets. Bankers' acceptances are considered very safe assets, as they allow traders to substitute the banks' credit standing for their own, particularly convenient when dealing with unknown trading partners.

Certificates of deposit - and now you are completely confused because I just told you that they are not traded in capital markets. Yours certainly will not because you, as a small individual investor, are not considered an institutional investor. Wickipedia states that a negotiable certificate of deposit is a large denomination certificate of deposit, a savings instrument issued by a bank. Usually bought by institutional investors, a negotiable certificate of deposit is normally issued in amounts ranging from $100,000 to $1 million or more. Investors in a negotiable certificate of deposit want a short-term, discounted investment, which provides a fixed interest rate return over an agreed period. The negotiable certificate of deposit often comes in bearer form and can trade in the liquid secondary market.

Money market funds provide liquidity funding for the global financial system. According to Financial Economics, the money market is the market for low-risk short-term debt, or so it has been thought for years - until August of 2007. What exactly transpired at that time?

Next in the series - make-up of money market funds, currency hedging, and what happens when low-risk, isn't?

Source: Wickpedia, Dogs of the Dow

Martha Harris Myron, CPA, CFP(US) TEP(UK) JP- Bermuda is an international Certified Financial Planner™ practitioner in a multi-family office for private wealth management. She specialises in independent fee-only cross border investment, tax, estate, and strategic retirement planning services for Bermuda residents with cross-border and multi-national connections, internationally mobile people and US citizens living abroad. For more information, contact martha.myron@gmail.com">martha.myron@gmail.com or 296-3528 at Patterson Partners Ltd.