If you’re new to investing, you may be interested in learning more about money market funds. Developed in the 1970s, money market investment funds allow the investor to purchase a group of securities, which typically provide higher interest rates than traditional savings accounts. These funds can be purchased directly from banks, as well as from brokers and/or investment firms. Read on to learn more about the benefits, advantages, and disadvantages of this type of investment.
Why Invest in Money Market Funds
One of the key advantages of these types of funds is that your money is liquid on a day-to-day basis. This means that you can access your funds at any time, typically without a penalty. Money markets, which in the U.S. currently hold $2.9 trillion in assets, are a very conservative way to invest, meaning that you are unlikely to lose money with this type of investment. Money market shares are always guaranteed to be worth $1; what changes is the amount of interest that can be commanded for each share. In addition, money market funds do not have any “load,” which is a term for fees associated with entering or leaving a particular fund.
Types of Money Market Funds
There are several different types of money market funds, each of which is advantageous for different purposes. Funds can be issued by the U.S. Treasury, by government agencies, and by other entities. Taxable money market funds are investments in high-quality, short term securities in U.S. dollar currency, which may be subject to state and federal taxes. National municipal money markets are very similar except that they are typically exempt from federal taxes. State municipal money markets, by the same token, are often exempt from state taxes. Your broker can advise you on what type of money market fund makes sense for your specific investment situation. In general, tax-exempt funds have lower rates of return than taxable funds, although the tax-exempt fund may still make more sense if your income is in a higher tax bracket.
Disadvantages of Money Market Funds
Although this type of fund is very low risk, its primary disadvantage is that it has a very low return on investment. For this reason, those who are interested in long-term investments, and do not need liquidity on a daily basis, may instead consider placing their funds in other types of investments that may be riskier, but have a much higher rate of return. In addition, money market funds, unlike savings accounts and some other types of investments, are not covered by federal deposit insurance. However, since they are regulated under the Investment Company Act of 1940, they are generally considered to be quite safe investments.
If you want to learn more about money market funds, the U.S. Securities and Exchange Commission maintains a webpage for investors that details the rules and regulations governing these types of funds. A basic introduction to money market funds is also available from nonprofit website Get Rich Slowly.