Quora Answer: Do Most Businesses Hold Their Cash in Money Market Funds?

The following is my answer to a Quora question: “Do most businesses hold their cash in money market funds?” 

Not all companies do this.  We would certainly not expect small businesses and proprietorships to engage in this.  Companies with significant cash reserves would keep a significant portion of it in the money market, if the funds are not in private placement.  There are some advantages to it. 

Firstly, the return tends to hover in the region of low single-digits.  This is much lower than stocks, and corporate papers.  The returns, once we factor in the account or fund fees, might even dip below the rate of inflation.  This loss of purchasing power is only a concern when the funds are parked there for a significant period of time, and well-managed businesses do not do this. 

As opposed to keeping all that cash lying around, the money market diminishes currency exposure and mitigates against inflation, even if it may be at a temporary loss.  Losing 1% to underperformance of the market in the short term is still preferable to losing 3.5% to inflation, for example.  Money market funds are invested in certificates of deposit, Treasury bills, and short-term corporate papers, all investment grade.  This means that the risk is extremely low.  It will never earn as much as in an equity fund, but it will not be subject to sudden loss of portfolio value. 

Finally, since money market funds trade in instruments with robust secondary markets, the fund is extremely liquid.  This means businesses may liquidate holdings as appropriate to pay creditors when due, or take out funds to fund a merger or expansion.