Based on the latest inflation figures, money market funds are a great, safe way to consistently lose money!

Morningstar.ca states that

“If present trends hold, 2006 will become the third year in a row, and the fourth year in the past five, that returns in the Canadian Money Market category will have lagged inflation.”

This means that the money saved in your money market fund is slowly losing purchasing power.

In this low-interest rate environments, managers of money market funds are finding it very difficult to keep up with inflation. The best way to improve the return on money market funds is to lower the fees!

For the median Canadian Money Market fund tracked by Morningstar, charging nearly 1% in MER and returning 1.9% after fees, the MER works out to about 34% of the gross return before fees. It’s simply too high a hurdle to overcome for money market funds to keep up with inflation, let alone produce any real return before taxes.

The MER is just too high. But as long as people keep putting money in money market funds, why would they change?