Maximize your returns by ditching money market funds

Canadian investors are a conservative bunch and are known to keep plenty of cash on the sidelines. How much money are we talking about here? Last year it was estimated that Canadians had $26.7-billion sitting in money market funds.

Money market funds are popular because they’re a safe place to park your cash and earn some interest. The funds are made up of high-quality, short-term government and corporate bonds.

Money market funds are certainly better than stuffing your savings under the mattress, but there are better solutions that can earn you a higher rate of return, such as the Savings Plus Account.

How fees eat into your money market returns

What some people don’t realize is that money market funds are mutual funds and investors are charged management fees to hold them just like regular mutual funds. These fees typically range from 0.2 per cent to 1.5 per cent.

No one likes high fees, but can you imagine paying a 1 per cent fee on your money market fund that’s only earning you a 1 per cent return? You are losing money compared to inflation.

You might be thinking that a 1 per cent yearly return isn’t the average for a money market fund, but you’d be surprised. One of the largest money market funds in Canada, with assets of just under $2 billion, charges a management expense ratio of 0.71 per cent and has earned, net of fees, 0.6 per cent annually over the past 10 years.

In addition to low returns and high fees, money market funds lack the safety of a guaranteed investment certificate (GIC) or a high interest savings account insured by CDIC. Money market funds try to maintain a steady unit price, but there’s always a possibility that their price will go down.

Why the Savings Plus Account is often the better choice

Instead of investing in a money market fund, consider the Savings Plus Account as a better alternative.

The Savings Plus Account pays a healthy 2.50%* everyday interest rate on its deposits. There are no monthly fees, no minimum balance required, and you get free unlimited transactions. You also get peace of mind knowing that your money is safe – deposits in the Savings Plus Account are eligible for deposit insurance from CDIC, up to a maximum of $100,000, per separately insured category**.

Final thoughts

With interest rates at record lows, money market funds are becoming less appealing. Investors used to earn 2 per cent on a money market fund and happily paid (or ignored) the 1 per cent fee.

However, when money market funds saw the peak of popularity, financial institutions paid next to nothing on their savings accounts, and so savers had little choice. These days, investors have options such as the Savings Plus Account which pays one of the highest interest rates in Canada on deposits with no fees.

Maximize your returns by ditching money market funds and going with the Savings Plus Account.

*Interest is calculated daily on the total closing balance and paid monthly. Rates are per annum and subject to change without notice.

**Equitable Bank is a member of CDIC. EQ Bank is a trademark of Equitable Bank.