Money market funds (MMFs) are an effective, low-risk solution for managing surplus cash, offering stability, liquidity, and yield. By investing in high-quality, short-term instruments, MMFs help organisations preserve capital, maintain access to cash, and generate income—all while providing the flexibility to meet evolving operational liquidity needs.
EU Money Market Fund Regulation (MMFR) introduced in 2017 established consistent standards for MMFs, mandating transparency and investor protection. The regulation categorises MMFs into specific types, each designed to address different investment priorities. In this article, we’ll explore the four main types—Constant Net Asset Value (CNAV), Low Volatility Net Asset Value (LVNAV), Short-Term Variable Net Asset Value (VNAV), and Standard VNAV funds—and explain how they align with goals such as capital preservation, liquidity, and yield.
CNAV funds aim to maintain a stable net asset value, typically priced at £1/$1/€1 per unit. To achieve this stability, they invest primarily in highly liquid, short-term government debt and treasury bills. Based on their high credit quality and short duration, CNAV funds are typically rated AAA by major ratings agencies. This focus on low-risk securities ensures that CNAV funds behave much like cash, with minimal value fluctuation.
For organisations prioritising capital preservation and instant liquidity, CNAV funds are a potential option. They are especially well-suited to businesses looking for a secure, temporary home for their cash, where immediate access and predictable value are critical.
LVNAV funds combine stability and low volatility with the potential for additional income generation. These funds aim to maintain a £1/$1/€1 per unit value under normal market conditions by investing in high-quality instruments such as government securities, certificates of deposit, and repurchase agreements. Prudent management of liquidity and diversification helps reduce the likelihood of NAV fluctuations. Similar to CNAV funds, LVNAV funds are also typically rated AAA by major ratings agencies due to their high credit quality and short duration.
Ideal for organisations that require a stable, low-risk investment with the flexibility to access cash when needed, LVNAV funds offer a practical balance of preservation and yield. Their cautious approach makes them a popular choice for treasurers managing short-term cash reserves.
Short-Term VNAV funds typically provide a slightly higher yield by accepting limited fluctuations in net asset value. Unlike CNAV or LVNAV funds, their NAV is not fixed and adjusts with market conditions. These funds are typically rated AAA or AA by major ratings agencies and invest in a broader range of short-term assets, such as commercial paper and floating-rate notes, providing a balance between stability and income potential.
Short-Term VNAV funds are well-suited to organisations willing to accept minor value fluctuations in exchange for potential enhanced returns. They strike a balance between capital preservation and yield, making them an attractive option for cash that doesn’t require immediate liquidity.
For organisations seeking higher returns, Standard VNAV funds provide the potential to further enhance yields. These funds invest in slightly longer-term assets, such as corporate bonds and government securities, resulting in greater exposure to market fluctuations and interest rate changes. Their NAV varies with the value of underlying investments, which can provide higher returns over time. Given their expanded investment universe and longer duration, VNAV funds are typically rated AA by major credit rating agencies
Standard VNAV funds are best suited for businesses with a longer investment horizon and a higher tolerance for risk. While they come with greater NAV variability, the potential for increased returns makes them a strategic choice for surplus cash not required in the near term.
Choosing the right MMF type depends on your organisation’s financial goals, risk appetite, and cash flow requirements. Here’s a summary to guide your decision-making:
CNAV and LVNAV funds offer the highest level of stability, making them ideal for organisations prioritising predictable value and security. CNAV funds are particularly suitable for cash-equivalent investments.
CNAV and LVNAV funds provide easy access to cash, making them suitable for businesses needing immediate liquidity. Short-Term VNAV funds can also work for slightly longer liquidity horizons as they typically offer quick accessibility.
For organisations open to slightly higher risk, Short-Term VNAV funds offer the potential for enhanced returns with limited NAV variability. Standard VNAV funds, with their focus on longer-duration assets, provide the highest yields but come with greater exposure to interest rate changes and market fluctuations.
Money market funds offer a versatile, low-risk solution for managing surplus cash, helping organisations balance stability, liquidity, and income generation. Whether you want to prioritise the certainty of CNAV or LVNAV funds, or seek higher returns with VNAV options, MMFs can be tailored to suit different operational and investment needs.
By aligning your fund choice with your organisation’s financial goals, you can ensure that surplus cash remains accessible, stable, and productive—even in uncertain economic conditions.
