If you are a UK or EU customer
What is Interest and why is it low risk?
When you use Interest, you hold money in funds known as “public debt constant net asset value” (CNAV) short-term money market funds. These are funds that invest only in the safest securities, namely government securities. Let’s break it down.
When you hold your money in Interest, it’s being invested in government bonds and government backed assets. According to the regulations applicable to money market funds, at least 99.5% of the funds’ assets will be government bonds or government backed securities. For example, if you invest in the USD money market fund, this means bonds issued by the US government or loans backed by those bonds as collateral. If an institution isn't able to repay the loan, the fund still owns the underlying government bonds to fall back on.
Ultimately, there is a risk that the government will not be able to pay its debt. However, this is extremely unlikely. The Interest funds we offer only invest in government bonds of governments with high credit ratings, such as the United States and the United Kingdom. These ratings are allocated by specialist credit rating agencies, such as S&P or Moody’s.
Constant net asset value
Money market funds like the ones we offer through Interest are designed to maintain capital, and not go down in value. This means that, even if the market price of government bonds can go down, these funds look at the price of the asset at maturity. Day-to-day fluctuations of the value of the underlying assets do not impact the net asset value of the funds. In technical terms, it means that the assets are valued using the so-called amortised cost methodology.
Money market funds like the ones we offer through Interest limit their investments to assets which only have a short period left (i.e. just over 1 year) before they have to be fully repaid. Money market funds are subject to strict rules to make sure they only invest in short-term bonds. These types of bonds are less sensitive to price fluctuations when interest rates change, compared to bonds with a longer maturity. Also, the funds are actively managed, meaning the fund managers make investment decisions based on whether or not they anticipate interest rates to go up or down any time soon and to ensure the funds’ maturity profile remains optimal.
Can I lose more money than I put in?
Our ‘Interest funds’ are designed to maintain their capital and not go down in value. However, an investment is never guaranteed and it’s possible that the net asset value of a money market fund decreases.
The most likely cause of negative returns within a money market fund are negative interest rates or interest rates close to 0%. We have seen this in the Eurozone (and EUR ‘Interest’ fund) in the last decade - interest rates set by the European Central Bank were negative during this period. As a result, the EUR ‘Interest’ fund decreased in value during this time.
Another scenario would be governments going bankrupt, and not being able to pay back their debt. The Interest funds we offer only invest in government bonds of governments with high credit ratings, such as the United States and the United Kingdom. It is extremely unlikely that these countries would go bankrupt and won’t be able to pay back their loans.
Looking back at data from the last 10 years, data suggests that in a scenario of stress, the worst case scenario, your holdings could be impacted in the following way. This is the impact if you would hold the money in Interest for one year.
$10,000 invested could be worth $9,990 after 1 year.
£10,000 invested could be worth £9,990 after 1 year.
€10,000 invested could be worth €9,930 after 1 year.
Please note that the above numbers are based on past performance (as of March 2023) of the last 10 years, which does not guarantee future performance.
You can learn more here about what happens if Wise or our fund manager becomes insolvent
Understanding the risks
These funds hold assets that are backed by governments. This is why this fund is deemed to be very low risk. However, during periods of extreme volatility access to this fund may be temporarily restricted in order to preserve the value of your investment.
An interest-earning fund is not a guaranteed investment and the fund does not rely on external support for guaranteeing the liquidity of the fund or stabilising the NAV per share. The risk of loss of the amount is borne by the investor.
There is always a risk involved with holding money, depending on how and where it is held. Even if it’s held as cash, your money is vulnerable to inflation and your deposit at a bank is only insured up to a certain amount. This amount is set per region/country.
Interest-earning funds are currently not available for US customers, but you might be still eligible to earn interest on your money if you live in the US.