What Is a Money Market Fund?

A money market fund and what Turkey still calls a "likit fon" (liquid fund) are the same product: an investment fund held in short-dated, interest-bearing instruments. "Likit fon" is the old, everyday name; "para piyasası fonu" is today's legal name. The CMB's Communiqué III-52.1 limits these funds' portfolios to instruments with at most 184 days remaining to maturity, and the portfolio's weighted average maturity to at most 45 days.

What does a liquid fund hold?

The "money market" is where institutions lend to each other short term. Maturities there run in days, weeks, or a few months.

Article 6 of III-52.1 defines a money market umbrella fund as follows: funds whose entire portfolio consists, continuously, of highly liquid money and capital market instruments with at most 184 days remaining to maturity, and whose daily calculated weighted average portfolio maturity is at most 45 days.

There are two separate limits in that definition:

• 184 days is the remaining maturity of each individual instrument. No instrument with a longer maturity may enter the portfolio.
• 45 days is the weighted average maturity of the portfolio as a whole, and it is recalculated every day. The fund cannot take in a few longer instruments and let the average drift; the whole must stay short every day.

The CMB's Guide on Investment Funds adds further limits to this framework. At most 50% of the fund's total value may be held in deposits or participation accounts, and the amount held at any single bank cannot exceed 6% of the fund's total value. In addition, except for funds with "katılım" (participation) in their title, at least 10% of a money market fund's portfolio is directed into government domestic debt securities.

The remainder generally consists of reverse repo, Takasbank money market transactions, short-dated government and corporate debt instruments, and short-dated lease certificates. What a given fund actually holds is set out in its prospectus and key investor information form, and varies from fund to fund.

The 184-day condition requires every asset in the portfolio to have a maturity. An equity has no maturity, so it does not appear in a money market fund as an investment instrument.

Article 7 requires a fund's title to be consistent with its investment strategy: a fund with "para piyasası" in its name must apply these rules.

Why does the price move smoothly?

The price of an interest-bearing instrument moves inversely when market rates change. The size of that move grows with maturity: the less time remains to an instrument's maturity, the less the same rate change moves its price. The 184-day and 45-day limits do exactly this; they arithmetically narrow the price's daily room to move.

The second reason is that income accrues daily. Interest and value increases from the portfolio are recorded as fund income the same day and are reflected in the unit price. Under Article 14, the unit share value is as a rule calculated and announced daily; the CMB's investor booklet states that this calculation is made every business day.

The result is a price series that moves in small steps on most days. But this does not mean "risk-free". Movements in interest rates, an issuer failing to pay its debt, and market conditions can affect the price. A money market fund is not a guaranteed product either; in III-52.1, a guarantee is specific to a separate type, guaranteed funds. The fund's assets are separate from those of the founder and the portfolio custodian and cannot be attached (Art. 5); this does not mean the fund's value will stay constant.

What did "b tipi likit fon" mean?

Under the old regime — Communiqué Series:VII, No:10, dated 1996 — funds were split into Type A and Type B. The test was a single thing: funds holding at least a quarter of their portfolio continuously in the shares of companies established in Turkey were Type A; all others were Type B.

Because a liquid fund held no equities, it was automatically Type B. That is where the name "b tipi likit fon" comes from; it was in fact an almost redundant phrase.

Article 37 of III-52.1 repealed that old communiqué. Under Article 38, the new communiqué entered into force on 1 July 2014; Provisional Article 1 gave funds established before that date one year to comply. In the classification in force today there is no Type A / Type B distinction. Neither that distinction nor "likit fon" appears in the list of umbrella fund types in the CMB's current investor booklet.

So "b tipi likit fon" is legacy vocabulary today. Its counterpart on TEFAS is the money market funds category.

Costs

A fund's expenses are met from its portfolio. The announced unit share value and return are therefore figures after expenses have been deducted; no separate deduction is seen.

Annex 4 of III-52.1 sets a ceiling on the total expense ratio by fund type. For money market funds that ceiling is 4.5 per hundred thousand daily, 1.65% annually. In the same table, fund-of-funds are at 4.38% and "other funds" at 3.65%. This is an upper limit, not the rate funds actually charge; the real rate varies from fund to fund and is announced on KAP.

Article 33 polices that ceiling: the founder checks the calculation over 3-, 6-, 9- and 12-month periods; if it is exceeded, the excess is refunded to the fund within five business days, and at period end the expense ratio and its breakdown are announced on KAP.

Beyond these, an entry or exit commission may be applied if its terms are set out in the prospectus and the key investor information form (Art. 15).

The last item is tax: withholding tax is deducted from fund gains. The rate is set by Presidential Decree and changes over time; for the current rate, the Revenue Administration's sources should be consulted.

The expense ratio is deducted from the return, whatever level that return is at. In a product whose return is driven by short-term interest rates, tenth-of-a-point differences in expenses become visible in the end.