Have you ever heard about money market funds? Yes, it sounds a lot like what you commonly know as a Money Market Account or rather MMA. MMAs are usually provided by various financial institutions and are commonly insured by FDIC, also known as the Federal Deposit Insurance Corporation.
These MMAs come with a limited number of transaction privileges. Money Market Funds, on the other hand, are an entirely different concept compared to the same. So don’t worry if you have never heard about the same because we are here to tell you all about these funds, including how to invest in them!
Let’s begin…shall we?
About Money Market Funds: What Are Money Market Funds?
So without wasting any more time, let’s get down to business! Money market funds are a type of mutual fund which invests in liquid, near-term instruments. These instruments are inclusive of cash, and cash-equivalent securities, accompanied by debt-based, high-credit-rating securities that come with a type of short-term maturity.
For instance, U.S. Treasuries are one example of the kind of maturity mentioned above. These funds provide investors with high liquidity and low-risk level and are also known as money market mutual funds. Money market funds are the kind of investments that are mostly sponsored by some sort of ‘investment fund companies – as a result, these do not carry any sort of guarantee of principal.
Key Takeaways: Money market funds can be defined as a kind of mutual fund which usually invests in short-term, high-quality debt instruments, cash equivalents, and cash. Although these aren’t safe or low-risk like cash, these funds are usually considered to be low-risk, especially on the whole investment spectrum. Money market funds are known for generating income (tax-free or taxable depending upon the portfolio) but are available with minimal capital appreciation.
Now that you know what are money market funds, let’s find out the pros and cons of the same! Scroll down to find out the advantages and disadvantages of investing in these funds before finding out details about the same.
Pros Of Money Market Funds:
There are several advantages of money market funds. These are as follows:
- Highly liquid.
- Very low-risk.
- Better Returns.
Cons Of Money Market Funds:
There are several disadvantages of money market funds. These are as follows:
- Not FDIC-insured.
- Lack of capital appreciation.
- Sensitive to monetary policy, and fluctuations in rate of interests.
Types Of Money Market Funds: There Are Types?
There are different types of money market mutual funds and that’s great considering all the many opportunities you are going to obtain in the process. The different types of money market funds are as follows:
Prime Money Fund:
Prime Money Fund can be defined as a type of fund which invests in commercial paper and floating-rate debt of assets that are non-treasury by nature, such as the ones issued by U.S. government agencies, GSEs (government-sponsored enterprises), and corporations.
Government Money Fund:
Government Money Fund can be defined as a type of fund which invests almost 99.5% of the total assets it possesses in government securities, and cash, and then repurchase agreements which are entirely collateralized by either government securities or cash.
Treasury Fund can be defined as a type of fund which invests in normal ‘U.S. Treasury-issued debt securities’ like Treasury bonds, Treasury notes, and Treasury bills.
Tax-Exempt Money Fund:
Tax-Exempt Money Fund can be defined as a type of fund which provides earnings free from U.S. federal income tax. Depending on all different types of exact securities such funds mostly invest in, tax-exempt money funds might also be exempted from all kinds of state income taxes.
Investing In Money Market Funds: How To Invest In Money Market Funds?
- Money market funds operate like any other mutual fund. These funds often issue shares or units that are redeemable to investors and are often mandated for following guidelines mostly drafted by financial institutions.
- Money market funds mostly invest in various kinds of financial instruments that are debt-based such as CDs (Certificates of deposit), BA (Bankers’ Acceptances), Repurchase agreements, and Commercial Paper.
- The returns that you will obtain from such instruments rely on market interest rates that are applicable. As a result, the total return that you are anticipating from money market funds also relies upon interest rates.
Frequently Asked Questions (FAQs):
You can invest in these money market funds by simply purchasing a Treasury bill, or by buying a money market mutual fund or even opening an MMA account at any bank. These investments are most commonly characterized by liquidity and safety – moreover, such shares are usually targeted at one dollar.
Yes, money market funds can lose money. Since these are a type of mutual fund which invests in securities, they can potentially and easily lose value. Most MMAs are insured by the FDIC or the Federal Deposit Insurance Corporation.
The disadvantages of the money market are as follows:
• Minimal balance requirements.
• Interest rates.
• Withdrawal restrictions.
Money market investments are usually considered to be a kind of safe investment. But, again, this is because the loans, in this case, are usually due for a short time period, usually ninety days or lesser – on a scale of risk factors, these aren’t considered to be very risky, in fact, lesser than investing in any stocks.
And It’s A Wrap!
Now that you have a fair idea about how money market funds work, what are you even waiting for? Explore the market and find the best money market funds out there, especially if you are a new investor on the block. This is a safe, low-risk investment, and there’s so much to experiment!
In the meantime, don’t forget to let us know your thoughts and experiences of the same in the comments below.