They provide the benefit of pooled investments, as investors can participate in more diverse and high-quality portfolio than they otherwise could individually.
While they are not insured under any type of government guarantee, money market funds are regulated by the Securities & Exchange Commission (SEC).
"Money market funds are usually used as a temporary 'parking place' for cash. If the stockmarket looks unstable to you, for example, you may want to sell some of your shares and invest that cash in a money market fund while you watch the stockmarket," explains S Jeyavarman, CEO NAMAL.
Alternatively, he says, investors can park some cash in money funds because they know the principal is safe and they can withdraw their money at any time.
Like similar funds abroad, NAMAL's new fund will invest in treasury bills/bonds, repurchase instruments, bank deposits, commercial paper and promissory notes.
"There is no limit on exposure, so long as the maturities don't exceed twelve months. Investments in corporate debt are open to unrated paper as well. The fund will bank heavily on the investment expertise of the fund manager," Jeyavarman told journalists on Tuesday.
Dividends and capital gains are tax free in the hands of investors, making it attractive to financial institutions like banks who pay value added taxes.
Ian Ferdinands, Manager Fixed Income Securities says there are no entry or exit fees, and fund management fees are kept low at 0.75 percent. However, when you add other fees like registration, trustees, the total cost moves up to around 1.50 percent.
Interestingly, in India where mutual funds are flourishing, total costs come to around 0.4 percent. In the US it's around 0.25 percent.
One year treasuries are currently trading at around eight percent, and investors don't usually pay high transaction fees.
Jeyavarman says they cannot guarantee a return either, unlike fixed income funds.
The money market fund is quite similar to NAMAL's income fund. But the income fund pays out two dividends as opposed to the money market fund offering four dividends each year.
Besides top corporate investors, the promoters are knocking on stock and money brokers doors, with an offer to split a percentage of their fund management fee, if brokers park their clients' excess cash.
Jeyavarman hopes to raise around Rs. 500 mn through the new fund, but declines to give specifics on what the commitment levels are now.
Minimum investment starts at Rs. 1 mn, and NAMAL is offering a special fix price of Rs. 10 per unit during the introductory period from September 6-10.
Investors can pick up a prospectus or put down some money at the NAMAL office or at any DFCC Bank branches.
NAMAL, which pioneered unit trust in 1991, is currently owned by DFCC Bank (80 percent) and the Employees Trust Fund (20 percent).
-LBO Newsdesk: LBOEmail@vanguardlanka.com