For organisations looking to make the most of their exess cash, Money Market Funds (MMFs) and bank deposits are two widely considered options. Both provide solutions to safeguard and grow cash reserves, but they function in distinct ways.
Bank deposits offer a straightforward, often fixed-rate solution, while MMFs provide the potential for competitive returns alongside greater flexibility and liquidity.
Money Market Funds (MMFs) are a type of low-risk mutual fund that invests in high-quality, short-term assets such as government securities, certificates of deposit, and commercial paper.
They are designed to provide stability, liquidity, and competitive returns and are a suitable option for organisations looking to optimise excess cash while maintaining flexibility and capital preservation within a transparent, regulated framework. MMFs operate within EU Money Market Fund Regulation (MMFR) which ensures transparency, investor protection, and stability through rules on diversification, liquidity, and stress testing.
MMFs come in various structures, including Low Volatility Net Asset Value (LVNAV) and Constant Net Asset Value (CNAV) funds, which maintain stable NAVs under normal market conditions, and Variable Net Asset Value (VNAV) funds, which allow for small fluctuations in NAV in exchange for higher potential yields. These options can be combined and offer flexibility for organisations with varying risk tolerances and cash management strategies.
Bank deposits are funds held in savings, current, or term deposit accounts at financial institutions, commonly used for managing operational cash or storing surplus funds.
Demand deposits, such as those in current or savings accounts, provide immediate access to funds for day-to-day needs, while term deposits require funds to be locked in for a set period, typically offering slightly higher interest rates in return.
Although generally considered secure, institutional deposits are not typically covered by government-backed insurance schemes, leaving businesses with limited protection in the event of a bank failure. Bank deposits also often provide fixed interest rates, which may not adjust to rising market conditions, limiting yield potential.
When choosing between MMFs and bank deposits, understanding the differences in returns, liquidity, and risk is essential.
Returns
MMFs deliver competitive returns and are often more responsive to interest rates changes by investing in diversified, high-quality assets with a range of short term maturities, potentially outperforming traditional deposits. Bank deposits, in contrast, typically offer lower, fixed returns, especially for highly liquid daily access accounts.
Liquidity
MMFs provide efficient access to funds, with many allowing same-day or next-day redemptions, making them ideal for managing organisational cash flow. Bank deposits offer high liquidity for demand accounts, but term deposits can restrict access, often imposing penalties for early withdrawals.
Risk and Security
MMFs maintain a low-risk profile through issuer diversification, regulatory requirements and credit rating guidelines. Bank deposits are generally seen as secure; however, they are not typically insured or guaranteed for institutional balances, leaving organisations exposed to greater potential counterparty risk in the event of bank failure.
For organisations looking to maximise cash productivity, MMFs offer a flexible and effective solution for liquidity management. With their blend of capital preservation, competitive returns, and high liquidity, they are particularly well-suited for addressing short-term operational requirements while supporting broader strategic financial goals.
While bank deposits may provide ease of use and consistency, MMFs are an ideal choice for businesses that prioritise accessibility and efficiency in managing surplus cash, ensuring funds remain secure and readily available to meet organisational demands.
