Money Market funds are mutual funds, but they are not normal stock or bond funds. Instead, a money market mutual fund invests in short term financial securities and is typically used for different purposes than other mutual funds.
What Are Money Market Funds?
Most often money market mutual funds are invested in 30 day securities but they can be for longer periods. 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 mutual 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.
Money market funds 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.
Characteristics of a Money Market Mutual Fund
Money market funds 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, especially if you are not using the fund in conjunction with other investments.
Uses of a Money Market Fund
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 Vanguard or Fidelity for this use.
You can transfer money to the money market account from your bank and have it ready for immediate investment when stock prices are advantageous. Otherwise, if you place an order and transferred money from your bank at the time of the order there will probably be a delay of several days before it is processed and prices could change dramatically.
Because money market funds do pay better than bank savings accounts, even money market accounts, investors also often use money market funds as a sort of parking place for cash they want to use later. This is helpful when you have an upcoming use of funds but want to take advantage of high stock prices and sell them previous to the time the money is needed elsewhere.
Use of a Money Market Mutual Fund
Because of the special characteristics of money market mutual funds you will not want to open one until your needs require it, but when they do a money market fund can be an important part of your financial success program. It is a good thing to know about and keep in mind for that reason.
