What is a Money Market Fund?

Money Market funds are mutual funds, but they are not normal stock or bond funds. Instead, these funds invest in short term financial securities.

Very often these investments are in 30 day securities but they can be longer. The SEC does require that the average length be ninety days or less. They are always low risk and highly liquid.

These funds operate a little differently than other funds. Instead of the price of shares varying with dividends and capital gains, each share is maintained at a constant value of one dollar. The number of shares is then adjusted to reflect the increase in value.

They are often thought of as cash funds because they are very fluid, but they should not be confused with bank/credit union money market accounts. Instead they are held at brokerage firms or investment companies.

For this reason, remember that they are not insured by the FDIC. But since they are invested in a wide variety of business and government securities for such short terms they are generally considered very safe. And they have the advantage of paying slightly higher rates than usual bank money market accounts.

One additional concern with money market mutual funds relates to fees. If you have to pay an annual fee to your investment firm you will offset some of your earnings. So, while some people use these accounts almost like a checking account, be sure to consider these costs if you are not using the fund in conjunction with other investments.

However, one of the best uses of money market funds is in moving money in and out of other investments. Many investors maintain an account with a company like Vangard or Fidelity for this use.

They transfer money to the account from their bank and have it ready for immediate investment when stock prices are advantageous. Otherwise, if they placed an order and transferred money from their bank at the time of the order there might be a delay of a few days before it was processed and prices could change dramatically.