Should you choose term deposits over money market mutual funds?

With the widespread rise in interest rates in recent months, retail banks are promoting term deposit accounts (CATs) over money market mutual funds. 
 

What are the differences between term accounts and money market funds? 
 

Term accounts (CATs) are being promoted by retail banks because they are, in effect, an alternative source of funding for banks, which are facing more restrictive refinancing conditions from the European Central Bank (ECB) as part of its so-called “quantitative tightening” policy. Through these term accounts, investors—both individuals and corporations—can thus access rates that currently exceed 4%. 

Over this time horizon, term accounts compete with money market mutual funds. There are fundamental differences between the two instruments, starting with their liquidity. It is possible to invest in a money market mutual fund on an ongoing basis, whereas opening a term account generally requires a single initial deposit.
Furthermore, when it comes time to withdraw funds, cashing out a time deposit before maturity requires the customer to give 32 days’ notice, whereas they can access their funds the very next day if they choose to sell their money market fund shares. Furthermore, when a customer wishes to withdraw the amount invested in their term deposit account before the maturity date, the initially projected return is generally reduced by an early withdrawal penalty, which is determined by the terms of the contract and varies by bank.
 

From a tax perspective: as its name suggests, a time deposit has a fixed maturity date. And this has tax implications at the time of maturity, because the customer must pay tax on all interest earned—even if he or she decides to reinvest the principal in a new time deposit. In contrast, with a SICAV, the investor simply remains invested until they need their funds. And if they opt for a partial withdrawal, they will be taxed only on a pro-rata basis for the interest and capital gains involved.
 

What are the risks? 
 

The risks borne by the investor are not the same: as financial instruments, money market SICAVs carry market risk that does not exist in the case of guaranteed banking products such as term accounts. But the latter are not as straightforward as they seem: they are loan agreements that make the customer a creditor of their bank. If the bank goes bankrupt, the customer may have difficulty recovering their money.
As for money market SICAVs, these are funds that are exposed to a wide range of debt issuers, including banks, insurers, and large corporations. This diversification provides protection in the event of significant market turbulence. While offering the potential for returns, an investment in a Sicav can be risky, and performance is never guaranteed. However, by diversifying across several types of funds, it is possible to reduce this risk.
 

Does the current market environment favor money market funds? 
 

Interest rates are currently stable in Europe and remain at high levels; however, the containment of inflation suggests that monetary policy may be adjusted, leading to a likely decline starting this summer. Banks are already anticipating this trend and have lowered their CAT rates. Money market funds, meanwhile, continue to offer an embedded yield of nearly 4%.

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