ACCA Advanced Financial Management (AFM) Practice Exam

Money market funds primarily invest in which type of securities?

1. Long-term bonds

2. Foreign currencies

3. Short-term securities

4. Equity shares

The correct answer is: Short-term securities

Money market funds primarily invest in short-term securities, which include instruments with high liquidity and short maturities, typically less than one year. These securities are considered less risky compared to long-term investments and provide investors with a safe place to park their cash while earning a return. Common types of short-term securities that money market funds might invest in include Treasury bills, certificates of deposit, commercial paper, and repurchase agreements. The focus on short-term investments enables money market funds to maintain a stable net asset value and provide liquidity for investors looking to access their funds quickly. In contrast, other options represent different investment strategies or instruments. Long-term bonds involve holding securities with longer maturities, which carry more risk and price volatility compared to the stability sought by money market funds. Foreign currencies pertain to foreign exchange markets and involve risks related to currency fluctuations, while equity shares represent ownership in companies and subject investors to stock market volatility and potential loss of capital. Each of these alternatives serves distinct purposes within an investment portfolio, but only short-term securities align with the money market fund's objectives of safeguarding capital and providing liquidity.