Money market funds get a boost

With expectations high that the U.S. Federal Reserve will raise interest rates in December, Korean investors are piling money into products most likely to deliver high returns when the key rate goes up.

That has led to a particular spike in the popularity of money market funds, which invest in short-term debt securities issued by governments and large corporations. These funds have historically yielded higher returns with higher interest rates.

Between Oct. 1 and 18, a total of 12.2 trillion won ($10.7 billion) were newly invested in money market funds, according to fund evaluation company KG Zeroin on Friday. The funds are considered relatively low-risk, drawing in cautious investors seeking safe assets amid increased market uncertainties linked with the Fed decision as well as fluctuating oil prices and the American presidential election.

The massive capital inflow marks a drastic turn from previous months of outflow. In September, money market funds registered a net outflow of 13.8 trillion won, following an August outflow of 4.8 trillion won.

When looking at the long run, though, money market fund investment has been steadily rising in the country. In the first quarter, accumulated investment in money market funds stood at 103.4 trillion won, according to the Korea Deposit Insurance Corporation.

In early August, total money market fund investment set a record high of 130.2 trillion won, surpassing the previous record held seven years ago when the global financial crisis hit the local market.

That same figure was 93.4 trillion won at the end of last year, 82.4 trillion won in 2014 and 66.4 trillion won in 2013.

Moon Soo-hyun, an analyst at NH Investment & Securities, points to a capital outflow from other types of funds such as bond funds for the increase. “Bond funds can deliver losses when the interest rate goes up,” the analyst said. “So investors are pulling out their money.

“Even though money market funds provide lower yields than other high-risk funds, many investors turn toward them due to the relatively low risk.”

Bond funds have seen a net outflow of 78 billion won so far this month, according to Korea Financial Investment Association numbers released last week.

Analysts believe some investors are cashing in on their equity fund investments and reallocating the profit to money market funds as third-quarter earnings reports by conglomerates have not been so rosy.

“Whenever there is talk of an interest rate hike, money market funds get a boost,” said a source in the securities industry who declined to be named. “However, investors should also be reminded that the products do not come with a principal guarantee [are not insured by financial regulators].”

BY PARK EUN-JEE [park.eunjee@joongang.co.kr]