Should you park cash in Money Market funds or in an ISA?

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Should you park cash in Money Market funds or in an ISA?

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Should you park cash in Money Market funds or in an ISA?

Post by Bigbanks » Fri Jan 19, 2018 11:15 am

There are many Money Market funds with every institution. E,g. Listed on RBC wealth management site ... default.fs

Discount brokers may not issue or manage their own MM funds, but do offer thousands of them managed by fund companies. E.g Listed on Questrade

I used to only park cash in Investment Savings Accounts (ISAs) such as DYN1300 with Scotia, RBF2010 with RBC. Why?
1. It is insured up to 100,000 per account per client by CDIC(in Canada) or FDIC (In U.S)
2. Ultimate liquidity: as in, when you sell the fund the money is immediately freed to be used for trading. No waiting until next day settlement
3. A few years back (as they were especially from 2002 to 2004 and 2007 to 2009) some of the MM funds were offering 0.5% yield with a management fee of 0.4% which means your return would be negligible. MM funds performed far less than ISAs back then.

Now we are in 2018, I would like to share some of my recent observations as they start to get interesting.

In a rising interest rate environment, MM fund reacts immediately. It rises with central bank’s announcement almost simultaneously. ISA on the other hand – Not so much. It eventually does. But you never know by how much and when.

There used to be only Serie A MM funds available for individual investors to purchase. Now there are at least Series A (regular), Series E (premium usually with a minimum purchase amount 100,000), Serie D (available in self directed investment accounts) and you still have the good old Series F (only available via a financial adviser). More choices more competitive rates generally

MM fund Liquidity has improved over the years thank to the rise of Mobil banking, online investing. In my opinion it is no longer a deciding factor when comparing with ISA.

You do still have item #1 to worry though and I do not seem to have found a simple solution yet. Let’s just say that the big SIX are probably too big to fail. In an event if that was to happen, just imagine what would happen to all your stocks, bonds, ETFs, non-money market Mutual Funds. MM funds might be your least worry. CDIC may not be able to make cash available to you right away like an ISA. But you should be able to get everything back after CDIC sells the institution and its assets in a matter of when and how. Bottom line is – Cash is Cash


Re: Should you park cash in Money Market funds or in an ISA?

Post by MoneySaver » Fri Jan 19, 2018 11:59 am

Thank you for a great article.
I always wondered what the funds' "series" mean; I thought it's much more complicated or different.

It's interesting that you say MM funds react immediately to interest rates, since AFAIK they don't even have a stated rate.
I'll take it to mean that whatever return some fund had it increased when central bank's rate goes up.
That would mean (to me) that much of the fund is just... "saved" by the bank; I'm not sure how else they get better return just because central rate is better. Could it be a coincidence?

I think you might be wrong about where the money comes from when a bank defaults: selling it's assets may not be enough, but all insured banks pay premiums to CDIC and FDIC just like you pay for home insurance and some of that money (after they pay their fat salaries and bonuses) goes to a fund to pay you back... but only for certain types of investments/cash.

These are all my thoughts and may be wrong so don't base your decisions on this :-)

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