A money market fund is a type of mutual fund that will invest only in money market instruments. It should be noted that a money market fund should not be confused with a money market account.
The latter is a special type of savings account while the money market instruments that make up a money market fund is a very liquid short-term type of debt security. Investors who do consider a money market fund should know they will not be guaranteed a return upon investment; however, money market funds do typically provide a much lower level of risk than many other types of investments.
Because the level of stability of the fund is tied to the investments contained within the fund, it is possible for a money market fund to lose money. Generally, this doesn’t occur, but investors should be aware of the possibility.
Without a doubt, probably the biggest advantage of a money market fund for an investor is the safety of this type of investment. Investors can take advantage of the fixed return this type of investment provides over a short time period.
When an investor purchases a money market fund they are basically purchasing debt securities that have been issued by large corporations as well as the government and even banks. This gives you the advantage of having a relatively low default risk while enjoying high returns that are typically not available in low risk investment products.
In addition, investors can enjoy the fact that money market funds do not typically have a large minimum purchase requirement. This means you can get in this advantageous investment even if you do not have a lot of extra cash.
When considering the purchase of a money market fund, it is important to understand there are two options available; tax-free and taxable. Most taxable money market funds contain investments in government agency securities, U.S. Treasury securities, CDs, bankers’ acceptances and repurchase agreements.
Tax-free money market funds generally do not provide a large variety of choices; usually containing investments based on entities that are federally tax-exempt.
Depending on where you live and the funds you choose, it may also be possible to purchase some funds that are also exempt from state and local taxes. Be aware that tax-free funds do come at a cost; they typically have a lower yield than taxable funds.
