The current financial landscape is marked by a significant decline in the yields of traditional savings options, ranging from solid bank deposits to flexible money market fundsThis shift has sparked intense discussions in the market about the potential extinction of money market funds, once considered a go-to choice for young investors eager to explore their first investment opportunities.

A prominent example is Yu'e Bao, the money market fund launched by Alipay in 2013, which at its peak offered a staggering 6.69% yieldToday, however, its return has dwindled to around 1%, raising concern about its future viability.

The Era of Easy Profits

Yu'e Bao gained immense popularity shortly after its debut, leveraging the large user base of Alipay

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Its success propelled Tianhong Asset Management, a relatively obscure fund company at that time, to prominenceThe fund transformed Tianhong from a struggling small company into a major player in asset management, achieving the highest market size in the sector, with over 7.6 trillion yuan in assets.

The years following the launch of Yu'e Bao were characterized by strong liquidity and high returns, allowing even those lacking investment knowledge to earn around 6% from simple savings or fundsThis return was akin to risk-free rates commonly sought by investors.

However, as the market has evolved, this once-lucrative financial environment has changed drastically, with unprecedented volatility in both stock and bond markets.

The performance of money market funds, tied closely to the prevailing economic policies, reflects a broader trend

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The foundational assets of these funds—cash, time deposits, short-term financing notes, and interbank deposits—have plunged in profitability due to shifts in monetary policy.

For instance, a report published by Rong360 revealed that the average interest rate for 3-month bank time deposits sank to just 1.268%, while 1-year rates fell to around 1.588%. As a result of these declines and the easing of monetary policy, yields on government bonds have also decreased significantly, negatively impacting the returns on money market funds.

In December, reports indicated that for the first time, yields on 1-year government bonds dipped below 1%, further stressing these funds.

The Call for Transformation

In light of dwindling yields from cash-type money market funds, one must ponder whether these products still hold value

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Currently, their only advantage over bank deposits is their flexibility in terms of access and withdrawals.

A historical parallel can be drawn with the U.Smarket, where PayPal introduced a money market fund in 1999 that gained substantial tractionHowever, as U.Srates fell, similar products lost their appealFund managers resorted to waiving fees to retain customers, but low yields ultimately drove users away.

Yet, the American market has not completely abandoned money market fundsIn light of recent interest rate hikes by the Federal Reserve amid banking sector turmoil, many investors turned back to money market funds, resulting in a historic surge, with assets surpassing $6 trillion for the first time in January 2023.

This influx was primarily driven by funds holding Treasury securities rather than traditional bank deposits, emphasizing a distinct shift in investors’ preferences.

Returning to China, is it true that all money market funds have lost their competitive edge? Interestingly, some funds continue to outperform the market, yielding over 3% returns

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Funds like the Red Clay Innovation Fund and Everbright’s fund, although categorized as money market funds, boast unique underlying asset selection that sets them apart.

For example, the Red Clay fund allocates only 27% of its assets to cash, focusing instead on corporate bonds, which takes up 73% of its portfolioIn contrast, Tianhong's Yu'e Bao allocates less than 10% to bonds.

Additionally, Alipay recently launched Yuli Bao, positioned as a cash management tool, offering yields above 2%. While it superficially resembles a money market fund, its investment strategy encompasses not just bank products, but also trust products, suggesting a potential direction for the future evolution of traditional money market funds.

If money market funds do not innovate and adapt their investment targets, it is unlikely they will retain relevance in a continuously changing economic landscape.