NASAA Series 65, Uniform Investment Adviser Law ExaminationInvestment Vehicle CharacteristicsMedium
A client holds a significant amount of cash in their brokerage account and is concerned about its purchasing power being eroded by inflation, but also wants to maintain immediate access to their funds for unexpected expenses. Which of the following cash equivalent investments would be most suitable for balancing these concerns?
- AMoney Market Mutual Fund
- BCertificate of Deposit (CD)
- CCommercial Paper
- DTreasury Bill (T-Bill)
Show answer & explanationAnswer & explanation
Correct answer: A. Money Market Mutual Fund
A Money Market Mutual Fund offers daily liquidity, typically higher yields than a standard savings account, and invests in short-term, high-quality debt instruments, making it suitable for balancing inflation concerns with immediate access.
Why the other options are wrong
- B. CDs offer fixed rates but generally lock up funds for a specific term, limiting immediate access.
- C. Commercial paper is short-term but typically purchased in large denominations by institutional investors, and may not offer the same level of liquidity for a retail client.
- D. T-Bills are highly liquid but typically require a minimum investment, and while safe, their returns might not always keep pace with inflation as effectively as money market funds during certain periods.
Money Market Mutual Fund
A type of mutual fund that invests in high-quality, short-term debt instruments, providing high liquidity and generally stable value.
- Invests in short-term debt (e.g., T-Bills, commercial paper, CDs).
- Maintains a stable net asset value (typically $1.00 per share).
- Offers daily liquidity (can withdraw funds easily).
- Yields fluctuate with prevailing interest rates.
Memory trick: Money Market Fund: Liquid cash, decent yield, like a flexible money pot.