Government Bonds and Money Markets

In this blog I’m going to explain what a Money Market Fund (MMF) is, whilst looking at both the pros and cons of investing in such a fund. I’ll also compare this to investing in Irish Government Bonds. Money Markets themselves have become a lot more attractive recently due to increased interest rates. These short term investment solutions are ideal for individuals or companies who want to get a return on their cash which may be sitting on deposit earning nothing.

So, first of all, for anyone who has not heard of a Money Market Fund, they can be easily explained as a fund that invests in low risk, short-term securities such as deposit accounts in banks.

In Ireland at the moment, banks are offering very little return for any money that’s being held on deposit. So, to get these funds working for you, it may be worth looking into a Money Market Fund.

The Pros of a Money Market Fund

These are just a few of the pros of an MMF:
 

Safety
A money market fund is usually rated very highly. For example, the one we use (which can be found here) has an AA rating, with nothing lower than BBB being included in the fund.
 
Liquidity
As mentioned, an MMF is usually for short-term investing. With this fund you can get the funds disinvested within 48 hours and they can then be transferred to your personal bank account or invested elsewhere.
 
Stability
Money Market funds are less volatile than an equity fund and have a reduced risk of losing any capital. On the ESMA risk scale they’re ranked as a 1 out of 7, the lowest level of risk.
 
Competitive Yields
The yields on money market funds have become increasingly competitive. This can be largely attributed to interest rates increasing over the past 18 months.

The Cons of a Money Market Fund

Rather than just focusing on the positives I wanted to show a fair and unbiased review of MMFs. Here are three of the cons:

 
Low Returns
Although rates are quite attractive right now, in the long term global equities will outperform these funds. When you take away fees and tax (if applicable), this can erode the growth in the Fund. If the returns are low, then it’s possible the fees could be higher than any profit made, resulting in the fund being worth less after the investment than before.

Market Risk
Although Money Market funds are low risk, there’s always going to be some form of market risk when you’re investing.

Limited Growth Potential
Again, when compared with global equities there is only going to be one winner in the long term, even in the short term the money market fund can only return a limited amount compared to the growth potential with global equities.

What are Irish Government Bonds?

 
Investing in an Irish Government Bond is essentially lending the Irish Government money with a promise that they will give it back to you with interest after an agreed period of time.

For example, the 2027 Irish Government Bond (maturing on the 15th May 2027) is currently priced today, 14th Nov 2023, at 91.35 and will you give you a total annual yield of 2.9% (0.2% of which is a coupon received annually and the remaining will be capital growth received at maturity). As an Irish Investor (both Irish resident individuals and companies), the growth is tax free, whereas the trivial annual coupon amount is subject to income tax.

Let’s look at an example:
 

• You invest in a €100,000 today in the 2027 Irish Government Bond.
• After all fees, you receive back circa €106,500 in May 2027 as well as an annual coupon of €200 per annum between now and May 2027.
• The c. €6,500 growth you have received is Tax Free. The €200 per annum is subject to Income Tax.
• This represents a 1.87% Annual Net Return on your cash (which is likely getting no return at the moment).

Government Bonds are often seen as the safest form and lowest risk type of investment, as you’ll get your agreed return and capital back on the maturity date unless the government default. You can also withdraw your funds before the maturity date but the value of the Bond can and does fluctuate with interest rates. This could impact the price of your Bond if you decided to sell before it matures.

What next?

 
Both the Money Market Funds and the Irish Government Bond could form part of your portfolio. However, you should talk to your Private Client Manager to see if they are an appropriate investment structure for your portfolio. Never do anything without seeking formal, professional advice!

If you’d like to find out more, please don’t hesitate to give us a call on 01 908 1500 or email us at info@metisireland.ie.

Ronan Queally

Financial Planner