What it means
Money market funds hold only the safest and shortest instruments, which keeps them very stable but caps the return. A cash plus fund relaxes those limits slightly, extending the average time to maturity and allowing a modest allocation to investment grade corporate paper.
The aim is typically a return of a fraction of a percentage point to around one percentage point above a cash benchmark. Treasury teams and cautious savers use these funds for money they will need in months rather than days.
Operating cash that must be available tomorrow belongs in a bank account, and money not needed for five years belongs in longer-term assets, but the middle layer is exactly what a cash plus fund is designed for. The extra yield comes from three levers, and it is worth knowing which one a particular fund is pulling.
Duration risk means holding instruments maturing in months rather than weeks, credit risk means accepting good quality corporate rather than only government issuers, and liquidity risk means holding paper that is harder to sell quickly. Each lever adds return and adds a different kind of exposure.
Unlike a traditional money market fund that aims to hold a constant price, most cash plus funds have a floating value, so the unit price moves a little day to day. In normal conditions the movement is tiny, but it does mean the capital value is not guaranteed and a short holding period can end at a small loss.
The nuance that matters most is behaviour under stress. In calm markets a cash plus fund looks almost identical to cash with a better yield, and in a credit squeeze the difference appears quickly as spreads widen and the units fall in value.
Anyone using one should check its average maturity, its credit breakdown and its redemption terms before, not after, they need the money.
In practice
Real-world examples.
Example
A software company holds $40,000,000 of cash earmarked for an acquisition expected in about nine months. The treasurer places $30,000,000 in a cash plus fund and keeps $10,000,000 in the operating account, picking up roughly 0.5% more on the larger balance while retaining access within a few days.
Example
A university endowment keeps its next two years of planned building payments in a cash plus fund rather than in equities. The fund's modest price movement is acceptable because the money must be intact on known dates and the extra yield covers part of the professional fees.
Example
A family office compares a cash plus fund with a twelve-month fixed deposit offering a similar rate. It chooses the fund because the money can be withdrawn at short notice without the penalty the deposit would impose.
Formula
Calculation
Expected Net Yield = (Sum of each holding's weight x its yield) - Fund Fees
A cash plus fund holds three sleeves. Government treasury bills make up 60% of the fund at a yield of 4.00%, high quality bank certificates of deposit make up 30% at 5.00%, and short-dated investment grade corporate paper makes up the final 10% at 6.00%. The annual management fee is 0.20%.
The weighted gross yield is (60% x 4.00%) + (30% x 5.00%) + (10% x 6.00%) = 2.40% + 1.50% + 0.60% = 4.50%. Deducting the 0.20% fee gives a net expected yield of 4.30%. If the comparable bank deposit rate is 3.80%, the "plus" is 4.30% - 3.80% = 0.50%, which on a $20,000,000 corporate cash balance is $100,000 of extra income a year.Case study
Seen in the real world.
Linden Bay Logistics is a fictional, illustrative freight business created to show the trade-off. It held $25,000,000 of surplus cash earning 3.60% in a bank account and moved $20,000,000 into a cash plus fund yielding about 4.40% net, expecting an extra $160,000 a year with what the factsheet described as low volatility.
Eight months later a credit market wobble widened spreads on short-dated corporate paper. The fund's unit price fell by about 0.6%, and because the company needed $8,000,000 for a port deposit that month, it redeemed at a small capital loss that wiped out roughly half of the extra income earned to date.
In this illustrative case the treasurer kept the fund but changed the sizing rule, holding anything needed within ninety days in the bank account and using the fund only for the layer beyond that. The fund had done exactly what its documents said it would; the error had been treating it as a drop-in replacement for cash.
Watch out
Common mistakes.
- Treating a cash plus fund as a bank deposit with a better rate. The capital value can fall, there is no deposit protection, and the extra yield is payment for accepting real if modest risk.
- Ignoring the fee when comparing yields. A quoted gross yield of 4.50% against a 0.20% fee is a very different proposition from a net 4.50%, and only the net figure is comparable with a deposit rate.
- Putting next week's payroll in one. Money needed within days belongs in an instant access account, because even a one-day settlement delay or a small price fall can cause real problems.
Questions
People also ask.
How much more than cash should a cash plus fund return?
Typically a fraction of a percentage point to around one percentage point a year, and any fund promising far more is taking risks that no longer belong in a cash bucket.
Can a cash plus fund lose money?
Yes, over short periods, because the unit price moves with interest rates and credit spreads, although losses are usually small and short-lived in investment grade portfolios.
How quickly can I get my money back?
Most offer settlement within one to three business days, but the fund rules may allow longer in stressed markets, so read the redemption terms before committing.
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