Almost like cash
Money market mutual funds and Canadian Savings Bonds are close substitutes for cash—but watch for small differences.
If your objectives for your savings are a competitive rate of interest, liquidity and safety, the choices available to you are wide: You can choose provincial and federal marketable bonds, T-bills or cashable GICs. You might also want to look at deposit accounts, as banks and other deposit-takers up their rates to compete for this segment of your savings.
For low risk and high liquidity, Canada Savings Bonds (CSBs) and money-market mutual funds are among the most popular with investors looking for a conservative investment.
These two types of investments have a lot in common and are often viewed as equivalents. They earn comparable returns and both offer high degrees of liquidity in that they can be readily redeemed for cash.
Money-market funds are issued by mutual fund sponsors and sold by fund companies, investment dealers, banks and other financial institutions. Their main holdings are government treasury bills, which are actively bought and sold by the fund manager. Most Canadian money-market funds can be purchased with no sales arges.
CSBs are issued by the federal government – a special agency of the federal government known as Canada Investment and Savings, to be exact – and are heavily marketed around the time that Canadians are thinking about contributing to their registered retirement savings plans (RRSPs).
However, despite the fact they’re used as substitutes for each other in many investment portfolios, there are some significant differences between these two types of securities.
In terms of liquidity, for example, money-market funds hold a slight edge on CSBs. and usually you can redeem your investment at any time. You’ll get the sum total of interest that’s payable to the day you place your redemption order.
CSBs are slightly less flexible. Like the government T-bills that are the primary holdings of money-market funds, CSBs are issued by the Canadian government. However, unlike money market funds, which pay accumulated interest to the time that you redeem your investment — whenever that may be — CSB interest for the previous month is always paid out on the first day of the month. So you could lose out if your timing is off, for instance, if you redeem your CSBs on the last day of the month.
In terms of performance, be aware that these two types of products report their returns in different ways.
The rate of return on a new series of CSBs is set when that particular series is introduced so a purchaser knows just how much interest he or she will earn. (This interest rate can be adjusted upwards according to market conditions.) Not so with money market funds. As with all mutual funds, the returns that are reported on these investments represent what they have returned so far, not what an investor will earn in the future.
Although the returns on money-market funds probably won’t be too far off the posted CSB rates – after all, both rates depend short-term interest rates and the outlook for inflation – remember that money-market funds are actively managed portfolios of securities. By buying and selling the money-market securities in a portfolio, a fund manager has room to outperform or lag the returns on CSBs.