Are Money Market Funds For You?

Are Money Market Funds For You?

Money market funds are one of the most popular cash management tools. These investments are also touted as the safest type of mutual fund. But before investing in them, you should first know what they are, their benefits, and if they are suitable investments for you.

What Money Market Funds Are

Money market funds are mutual funds that invest in money or financial markets, which, in simple terms, means that you borrow or loan money, respectively. A money market fund is similar to your deposit account at the bank in that it takes your money and uses it for investment purposes. Then, a portion of the earnings, which come in the form of dividends, are paid to you. In general, money market funds pay out monthly dividends.

Money market funds typically invest in short term investments that mature in less than 13 months at the maximum. Since money market funds are investment with shorter time frame, the risk is significantly reduced. The idea is that lending the money for the short term is safer as there is a high probability that the amount will be paid back. Normally, money market funds invest in US Treasury issues, short-term corporate paper, and certificates of deposit. There are different kinds of money market funds based on the type of securities they buy. However, the most significant distinction is whether the dividends earned are taxable or tax-free.

The Advantages of Money Market Funds

With this type of investment, you are allowed to write checks that draw from a money market fund. This allows you to enjoy the benefits of dividend earnings, plus you can easily access your cash. However, you need to verify with your institution first regarding restrictions and fees.

Money market funds are most practical for parking cash you need in the short term. These needs may include down payment for a house, a car or a vacation. Also, since money market funds are completely liquid, you can sell your shares in a money fund anytime you want to.

Who Invests in Money Market Funds

Money market funds are for investors who want to earn decent returns from safe investments. These investments are usually liquid. This means that you have the privilege of drawing out the money within a few business days if you need to. Money market funds also allow you to take advantage of increasing interest rates. This is made possible by stashing your money in an investment that adjusts with the movements of the market.


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March 31st, 2009 | by business money |

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8 Responses to “Are Money Market Funds For You?”

  1. By Samuel S on Mar 31, 2009

    Do not worry! The Fed has just announced that eligible MMF will be backed and insured by the Treasury so your money will be safe (for now).

  2. By Young S on Apr 1, 2009

    Bank money markets are covered by FDIC, up to the current limit. Money market funds sold by mutual fund companies are not covered, you gain or lose. Stay with a reputable fund company.

  3. By mightymouse on Apr 2, 2009

    whether the fund is FDIC or not has nothing to do with its performance nor its ability to go below the $1NAV. FDIC means simple that the fed insured the funds up to $100K. If you want to know if your Money Market is at risk, 1) ensure that it has a $1 NAV (net Asset Value) 2) ask the fund manager for the latest portfolio positions and see if they have any CDO or subprime exposure (and therefore they will be an enhanced money market). Money Market funds are on a 30 days rolling schedule meaning that they can not invest in securities that exceed 6 to 8 weeks, they are build so that the bank will imply a $1NAV guarantuee. If your money market is backed by a big bank or a big institutional investor (i.e the Fidelitys' of the world), the likelyhood that they break the $1NAV is very remote as the bank will probably step up and fill the difference.
    Good luck

  4. By UnderTheBridge on Apr 3, 2009

    http://www.smartmoney.com

  5. By landaucj on Apr 3, 2009

    1) Put enough money into your 401(k) plan to receive the maximum match from your employer.

    2) Fully fund your Roth IRA, if you can do a Roth (there are income limits).

    3) Buy stock options or put more in your 401(k) with the rest.

  6. By God'sStrength on Apr 3, 2009

    Money market funds make more money when the stock market goes down. And vice versa.

  7. By daisycutter on Apr 3, 2009

    Although the interest will accrue throughout the month, it won't post to your account until the end of the month.

  8. By amber s on Apr 3, 2009

    You need to speak with a reputable financial counselor who can sit down and go over your financial goals. Stay away from the banks and credit card companies, those counselors do not work for you.

    Before you invest, make sure that you are free of debt. It makes no sense to invest at 12% while paying a credit card at 18%. Start small, minimize your risk by diversifying (mutual funds are great for that) and plan on investing for at least 5 years before you move money. That allows you to take advantage of market fluctuations.

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