Investing in monetary funds popular despite negative return

  • Negative deposit rate as defense mechanism
  • institutional investors want to limit losses

Which private investor is willing to be part of the ability to invest with a negative return? You would be kind of crazy. Nevertheless that is exactly what institutional investors, such as pension funds and insurers, do. Billions of euros are being invested in such funds, of which you already know that the return will be negative. Why do they do this?


Negative deposit rate

Europeans have about 1,200 billion invested in monetary funds such as term deposits, treasury bills or bonds with a short maturity. Until 2008, this was a nice alternative to the rock-solid and classic savings account. But this changed after the financial crisis. The European Central Bank decreased the intrests, causing hardly anything to earn on short term investments. The deposit rate of the ECB is now even negative. This means that financial institutions that want to put excess capital at the ECB, will have to pay while they used to earn for this.

Because of several new and stricter laws, financial institutions must build up a larger buffer to cope with potential new financial crises. Herefore they rather choose money from retail customers and, to a lesser extent, businesses. These are generally more loyal to their financial institution and do not change as quick from bank. Large sums of money are shifted more regularly with institutional investors. Because of this, financial institutions are not so welcoming towards them and handle a defense mechanism with the negative deposite rate. This is why investment institutes are automatically being driven towards monetary funds with a negative return.

Limit losses

However, it remains difficult to understand why we would consciously choose for investments which are not rendering.

A monetary fund offers the combination of safety, risk spreading and liquidity. Since the financial crisis, such funds can only invest in safe paper, the so called A-ratings are no longer allowed. Investing in a monetary fund also offers the possibility to spread the risk. After all they do not invest in only one institution. The funds are spread out over multiple publishers. Finally, who invests with large sums, would want to dispose these more flexible. Monetary funds offer that flexibility.

The target for the institutional investors is ultimately to minimize the losses. From this strategy is investing in monetary funds with a negative return a reasonable option.

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