Money Market Funds Explained

A money market fund is the lowest-risk type of unit trust in Sri Lanka. It pools investors' money and lends it out for short periods — usually a few months at most — to the government, banks, and large companies.

Because the money is only ever lent for a short time, the fund's value stays very stable. This makes money market funds the natural home for cash you may need soon: an emergency fund, savings you are about to use, or money waiting to be invested elsewhere.

What it invests in

A Sri Lankan money market fund holds only short-term rupee debt. In practice that means:

• Treasury bills — short-term loans to the Government of Sri Lanka.
• Repurchase agreements (repos) backed by government securities.
• Fixed and call deposits with licensed commercial banks and registered finance companies.
• Short-dated corporate debentures and commercial paper from listed or rated companies.

Regulations keep these holdings short-term — typically maturing within a few months, and well under about 13 months at the longest. Short maturities are what keep the fund stable and liquid.

Why returns move with interest rates

Because the fund constantly holds short-term debt that matures and is reinvested, its yield closely follows whatever interest rates are available in the market at the time. When market rates rise, the fund quickly reinvests at the new higher rates and its return climbs. When rates fall, the return drifts down too.

So a money market fund does not lock in a fixed rate the way a one-year deposit does — its return floats with prevailing short-term rates.

Risk: low, but not zero

Money market funds are classified as low risk, but they are not risk-free and they are not bank deposits:

• Units are not covered by the Sri Lanka Deposit Insurance Scheme.
• There is a small credit risk — if a bank or company the fund has lent to defaults, the fund can lose money.

Fund managers limit this by lending mostly to the government and to higher-rated institutions, and by keeping maturities short. But the safety comes from quality and short duration, not from a guarantee.

Liquidity

You can buy in or redeem on any business day. Small redemptions are often paid almost immediately, and full redemptions typically settle within a few business days. By law, a fund must pay redemption money within a maximum of 10 business days.

Who it suits

Money market funds suit anyone who wants their cash to earn a return while staying safe and accessible — emergency funds, short-term savings, or money parked between investments. They are commonly used as an alternative to a savings account or short fixed deposit. For a side-by-side comparison, see Money Market Funds vs a Savings Account.