Money market funds are professionally managed mutual funds which invest in highly liquid securities, usually known as money market instruments. The maturity of money market securities is less than thirteen months while keeping a short time frame of the maturity can also help reduce the risk of losing money. These funds have many similarities to mutual funds except for a considerable element of Net Asset Value or NAV.
Interested investors in money market can easily access it through money market funds though these instruments do not allow smaller investment companies off the hook when it comes to having the basic awareness of the commercial papers, Treasury Bills, certificate of Deposits, and repurchase agreement that compose the most part of money market funds portfolio. You have a number of choices when it comes to get a money market fund for you. There are easily available at mutual fund companies and brokerage houses. In the most recent time, there are many banks that offer money market funds to their clients.
Investing in a money market fund is similar to how you purchase and sell stocks in the stock market. At this point, buying and selling money means borrowing or lending cash respectively. Similar to your bank deposit account, these funds take your money for investment. Subsequently, they pay you a percentage of their returns in form of dividends, usually on monthly basis. The longer you loan (sell) money fund to somebody, the greater is the chance that something negative will happen and you won’t get your money back. For that reason, it is always wise to deal in a money fund with short time frame of maturity.
Money market funds are typically liquid kind of investment which means you can easily withdraw your money within a couple of business days. The rising interest rate can also benefit you in term of higher returns when you put in your cash in an investment that is going to adjust to the relevant markets. Furthermore, many fund companies allow you to write cheques to withdraw money from your money market fund. This way you not only gain dividend earning every month but also have an easy access to your money. However, it is highly important to have proper awareness of potential restriction or fees the fund institution holds on their offers.
Money Market Funds versus Money Market Accounts
Money market funds are often mixed up with money market accounts. So before we discuss how these funds work and how they can be advantageous for your investments, lets clear the pre-empt confusion between these two terms.
Money market funds are not FDIC insured and always carry a small risk for investors to lose money. they are sponsored by fund companies and do not have a guarantee of principal. Money market accounts, on the other hand, are interest based savings accounts which provide clients with limited transaction advantages and are offered by financial institutions. Unlike money market funds, these accounts are FDIC insured up to a certain limit.
When compared to passbook saving accounts, money market accounts come with a higher payable interest rate though they pay a lower interest rate than a total profit of a money market fund. These accounts also have restriction to access account balances with cheque writings. Money market funds on the contrary allow cash withdrawals on demand.
Why to Invest in Money Market Funds
There can be several reasons why money market funds due to their liquidity are the best suitable investing tools for investors. These include the following:
With money market funds, you get a safe and convenient parking spot for your money reserves which is great especially when you are not sure to make an investment or are expecting a similar cash disbursement for non-investment purposes. As mentioned earlier, these funds are liquid and safe; you will gain an expected total of money when you need it.
Easy transfer of Assets
You can occasionally transfer assets from one money market fund to another if you own a basket of mutual funds from a single fund institute. If you want to sell a fund before choosing another fund to buy, the mutual fund by the same fund institute may be the right place to park the sale proceedings. You can also exchange your money market mutual funds for shares of other funds in the same fund family at some appropriate time.
Access to Cash Management Services
Most fund companies regularly use these funds to offer cash management service to benefit their clients. By keeping your dormant cash into money market funds, they will get you added percentage points with your annual profits above those made by other investment options.
Risks Associated with Investing in Money Market Funds
Despite all the gainful rewards, money market funds do carry some risks which you should know before investing in a fund. First of all, they technically work as a security. The fund manager attempts to keep the fund price constant at $1 per share. However, no one can guarantee that the share will maintain its set price. If the price drops down, it means you have lost some or all of your investment. Even though losing money in money market funds is rare, it is still a possible instance.
Second, the rates of money market funds do vary from time to time. Accordingly, you cannot say how much money you will make on your investment next month. Last, a money market fund is always associated with inflation. Since money market funds are safer than other investment options, long-term returns on these funds are usually lesser than long-term average profits on riskier investment options. If you keep your money in a market fund for long span of time, it is more likely to be eaten away at your returns by inflation factor.
Money market funds have greatly simplified the term of investing money, making it easily accessible to individual investors. They are one of the safest and most liquid investment instruments that come with modest initial investment requirements and simple process for withdrawals. If chosen carefully, you can also enjoy some relief from all kind of taxes through the purchase of certain tax-free money market funds.