Money Market Funds Explained

Among the many types of investments, you might be looking at investing in the field of money market funds. These funds are a form of mutual fund, designed to focus on short term bonds or any other liquid or low risk securities. These are relatively safe investments, which can always complement an overall portfolio and can also be a good way to realize some of the long term forms of financial goals.

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Money Market Funds
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Going for a quick search:

Before you actually head toward investing in money market funds, you need to do some research and decide if this form is a low risk one with easy liquidity for you. It needs to be a perfect fit for all your needs. In case it is, you need to determine the specified investments you want for your funds to focus on and then compare past performances of multiple funds. Once you are completely ready, open up that money market account under your name through a brokerage service or a bank and use all the useful tracking information available to keep tabs on the investment.

Gathering info about money market funds:

Before you end up going for a hefty amount of investment in money market funds, you need to gather some information first. For that, focusing on some options might help.

Get to learn about money market funds:

MMFs invest in short term securities like commercial paper or U.S. treasury bills. There are multiple types of money market funds available, which include investing in tax exempt municipal securities, government securities and other general securities.

  • Banks mostly offer customers money market accounts, where the invested amount will earn a little bit extra interest than in other conventional savings accounts. These money market accounts from banks are primarily insured by the Federal Deposit Insurance Corporation.
  • On the other hand, there are money market funds through mutual fund companies and brokers, which are not at all FDIC insured and considered riskier than other money market accounts. Losing money in such a market fund is basically unheard of.

Understanding present goal of MMFs:

Such money market funds can maintain stable shares value while seeking ways to increase the wealth of stakeholders through proper accumulation of dividends and interest. In terms of practice, the present MMFs and accounts will produce limited wealth growth in an environment of limited risk.

  • MMFs are always considered one of the most conservative and safest modes of investments. It is mainly because they hold their money under U.S. government securities.
  • These accounts are further associated with highly rated corporate paper and even certificates of deposit.
  • Even though any investment is not at all risk free completely in any way, accounts and money market funds will come as close as you might get.

A bit of disadvantage:

Any kind of investment field has its share of pros and cons. Even though money market funds mostly have pros, there are some cons that you have to think about. There are some mutual fund companies charging an expense ratio or even fees paid to the company, for managing the MMF account. This ratio primarily includes administrative costs, investment advisory fees, other kinds of operating expenses and a fee charged as a distribution expense. The expense ratio is designed to be listed in the prospectus of the fund, which you need to go through carefully before finally investing. Some mutual fund operations are waiving the expense ratio because of the low rate of return in the present market. Other than MMFs, you might want to learn a bit more about debt related help if needed.

Investment in the field of MMFs:

So, after going through the pros and cons, you have finally decided to invest in money market funds. That is a great decision to take so far.

Understand types of money market funds:

There are various types of MMFs available, among which the common ones are tax exempt municipal securities, government securities or even generalized purpose securities as prime funds. These investments will always affect your yield.

  • Government securities mainly comprise of U.S. Treasury Securities and those issued by U.S. government agencies.
  • The tax exempt securities are mainly issued by state, national and local governments and some non-profit firms. Such accounts are exempt from income taxes and in some cases, even from state income taxes.
  • The last one is the general purpose security, which is comprised of corporate notes, commercial paper, private investments and other certificates of deposit.

Purpose of money market funds:

MMFs can be determined useful when you are planning for a liquid investment. It helps in withdrawing money any time using it as an emergency fund. Some of the other purposes of using a money market fund include investing as a percentage of total portfolios for providing safety, more than bonds or stocks. MMFs accounts can further be used as a holding place for your cash, especially when you are waiting for other investment opportunities.

Start by comparing the past yields:

Before you end up selecting a money market fund, you might have to check on historical yields over the past year. You can procure this information at any reputed online source. Later, you have to compare those collected yields to the Money Fund Report Average from IBC. It provides you with average yields of triple-A based money market funds. From there, you have to select a fund showing highest yields over IBC’s report over the longest time frame.

Buying MMFs:

Thanks to online brokerages or any other services, you can invest a specified amount into MMFs by just writing a check or making any kind of online transfer. MMFs are always a good place where you can save your bucks for any need in the foreseeable future. They will not be a good place for investing or storing your money that you plan to grow over a longer period of time. Here, you have to think of money market funds and accounts as your savings or checking accounts. There are some funds that even offer check-writing privileges as well.

Just make sure to learn more about MMFs before you actually head for this service. Once you get through the information, you will learn its importance and usefulness.

Author Bio:

Amy Walsh is an experienced and skilled business consultant and financial adviser. She helps clients both personally and professionally in long-term wealth building plans. During her spare time she loves to write on Business, Finance, Marketing and Social Media. She loves to share her knowledge and experts tips with her readers.