Money Market Fund Guide

Invest Safe: Money Market Funds

Money market fund are those which invest in short-term debt instruments like US Treasury bills and commercial paper and is also known as money market mutual funds. These funds are a popular cash management tool.

A money market fund’s objective is:

  1. To provide investors a safe place to invest,
  2. Which is easily available, cash-equivalent assets.

A subtype of mutual funds, money market funds are highly stable and are known for least risky consistent returns.

However, one should note that any income generated by a money market fund can be taxable or tax-exempt that depends upon the types of securities in which the fund invests.

It is a public money market fund whose main aim is to provide liquidity and current income by maintaining capital constancy.

Talking about MMF, Goldman Sachs is a leading provider of money market funds which has 35 years of experience.

Understanding money market

As money market funds have comparatively low returns, so those investors who are participating in employer sponsored retirement plans may not it find suitable to use money market funds as a long-term investment option because in order to meet their financial goals they will not see the capital appreciation in these funds.

When the stock market is particularly unstable and investors are not sure where to invest their money, then the money market fund can be a great safe haven. Though, as stated above money market funds comparatively carry less risk than stocks and bond counterparts.

This is so, because these types of funds usually invest in low risk instruments such as certificates of deposits or CDs, Treasury bills or T-bills, repurchase agreements and short-term commercial paper. Besides the money market, these funds also make a low single-digit return for investors, which in a down-market might be fairly attractive.


Why the money market funds are a great option to invest?

  1. Convenient: If your prime requirement is to maintain cash reserves, then money market mutual funds offer a convenient parking place. This is recommended even more, when an investor is not ready to make any investment or is anticipating a near-term cash payout for a non-investment purpose. Money market mutual funds provide greater safety and liquidity. It simply means that the investors will have an expected sum of cash at the moment that they need it.
  2. Liquidity: Money market funds typically do not invest in securities that trade in very small volumes. Instead, they usually trade in securities or entities that are in quite high demand like T-bills. That means that they are likely to be more liquid, which the investors can purchase into them and sell them with comparative relieve.
  3. Yield: Money market funds pay a yield-based on the holdings of the essential fund. The yield is usually automatically is again invested into the fund through purchase of extra shares in the fund. Yield makes money market funds a striking alternative to the mattress. Money market funds are managed within guidelines to get preservation of capital, liquidity and competitive yields.
  4. Diversification: Money market funds invest in an extensive variety of money market segments and issuers holding one of the essential occupier of a conservative investment approach -Diversification.
  5. Ease and flexibility: Money market funds provide flexibility in forecasting of cash because there is no necessity to commit cash for a definite period and even there are no penalties for redemptions.
  6. Charges: There are no fees to subscribe or redeem from money market funds (MMF) or in other words, the fees charged by a money market fund are transparent. Thus, money market funds allow you the freedom to move your assets in or out of the fund whenever you required.
  7. Brokerage: Brokerage firms often make use of money market mutual funds to provide cash management services and benefit to their clients. By putting a client’s latent cash into money market mutual funds will help to earn client an extra percentage in annual returns beyond those earned by other potential investments.

Why would you use Money Market Funds?

Obviously every investor wants appropriate return by making a relatively safe investment, then the money market funds are the best option for them. The investments made in these funds are generally liquid that means you can easily get your money out within a few working days. Also, you may get a benefit of rising interest rates by putting your money in an investment which will adjust to the markets.

There are many institutions which allow you write checks that draw from a money market fund. Because of which you get the advantages of dividend earnings and also an easy access to your cash. But before that you must ensure what are the restrictions or fees your institution has.

Where Can I Get a Money Market Fund?

When it comes to money market funds, you have choices. They are easy to find at brokerage houses and mutual fund companies – your free cash is sometimes swept into a money market fund automatically. More recently, a few banks are offering money market funds to their customers.

Negatives and Risks of money market funds:

Inflation risk:
Due to the safety and short-term nature of the investments the money market mutual funds generate lower returns than those of unstable investments such as stock and bond mutual funds. Because of which it creates the risk and the rate of return may not keep pace with inflation. For instance, if an investor is generating say 4% return in business money market account, but the inflation whining at 5%, then the investor is effectively losing its purchasing power every year.

Or in other words, over time, by investing in money market funds can make a person poorer that the dollars they earn might not keep pace with the increasing cost of living.

No insurance:

Another drawback of money market funds is that they are not covered by federal deposit insurance or by other federal government agency. Many other investments with equivalent returns like money market deposit accounts, online savings accounts and certificates of deposit are covered by insurance. SO there is a risk that you might lose your money and there is no guarantee that you will receive your money or at least $1 per share when you redeem your shares.

Even Expenses can take a charge:

At times when investors are generating 2% or 3% in a business money market account, then still small annual fees can take a substantial chunk of the profit. Again, this might become difficult for money market investors in keeping pace with inflation.

Any financial planner would categorize money market funds as an alternative to a savings bank account. It is highly liquid, redemption takes a short amount of time and its growth can be tracked via any mobile investment application. For young investors, it is must try sort of investment tool.

Related Posts

Search