Investors flock to MMF for short-term profits

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Investors flock to MMF for short-term profits

As investors struggle to find lucrative opportunities due to low interest rates and low growth, the money market fund (MMF), a short-term mutual fund with a maturity of less than a year, has risen to an all-time high, surpassing the previous record held seven years ago when the global crisis hit the local financial market.

According to the Korea Financial Investment Association on Tuesday, as of Aug.5 the MMF amounted to a little less than 130.2 trillion won ($117.7 billion) after 944.8 billion won of fresh investments rolled in the previous day. The last such record was on March 6, 2009, when it amounted to 129.6 trillion won. Retail investors’ MMF investment amounted to 27.1 trillion won, while institutional investors owned 102.9 trillion won.

The fact that investors are flocking to the MMF indicates that investors are targeting short-term profits rather than stability, as mutual funds invest in short-term products such as treasury bonds, corporate commercial papers and certificate of deposits without guaranteeing principle investments.

The sudden increase in investment injected into the MMF grew particularly in the second quarter, when in June the central bank unexpectedly lowered the key interest rate to 1.25 percent, shaving off 0.25 percentage points. The MMF’s favorable growth was in part aided by Kospi’s advancement above 2,000, triggering investors to redeem their equity funds and reallocate their investments on the MMF in the hopes of gaining larger profits.

In fact, in the last six trading days leading up to Aug.5, the local equity fund has been seeing more redeeming by investors. Excluding exchange-traded funds, on Aug. 5 equity funds suffered a net loss of 23.2 billion won from the previous trade. That day, 47.9 billion won of investments was injected while 71.1 billion won was redeemed.

In the last six trading days since July 29, a net of 273.5 billion won of investments were withdrawn. Equity funds currently amount to 69.6 trillion won.

“The MMF is growing at a rapid rate this year by adding 35 trillion won,” said Kim Seung-hyun, a researcher at Yunanta Securities. But Kim added that the MMF will likely reach its peak in the second half before shrinking as it did in 2009. The researcher also noted that the MMF, after reaching its peak in March, started to shrink as the last key interest rate cut by the central bank was in February and the stock market then started to go up.


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