Money market funds are one of the most popular cash management tools. These investments are also touted as the safest type of mutual fund. But before investing in them, you should first know what they are, their benefits, and if they are suitable investments for you.
What Money Market Funds Are
Money market funds are mutual funds that invest in money or financial markets, which, in simple terms, means that you borrow or loan money, respectively. A money market fund is similar to your deposit account at the bank in that it takes your money and uses it for investment purposes. Then, a portion of the earnings, which come in the form of dividends, are paid to you. In general, money market funds pay out monthly dividends.
Money market funds typically invest in short term investments that mature in less than 13 months at the maximum. Since money market funds are investment with shorter time frame, the risk is significantly reduced. The idea is that lending the money for the short term is safer as there is a high probability that the amount will be paid back. Normally, money market funds invest in US Treasury issues, short-term corporate paper, and certificates of deposit. There are different kinds of money market funds based on the type of securities they buy. However, the most significant distinction is whether the dividends earned are taxable or tax-free.
The Advantages of Money Market Funds
With this type of investment, you are allowed to write checks that draw from a money market fund. This allows you to enjoy the benefits of dividend earnings, plus you can easily access your cash. However, you need to verify with your institution first regarding restrictions and fees.
Money market funds are most practical for parking cash you need in the short term. These needs may include down payment for a house, a car or a vacation. Also, since money market funds are completely liquid, you can sell your shares in a money fund anytime you want to.
Who Invests in Money Market Funds
Money market funds are for investors who want to earn decent returns from safe investments. These investments are usually liquid. This means that you have the privilege of drawing out the money within a few business days if you need to. Money market funds also allow you to take advantage of increasing interest rates. This is made possible by stashing your money in an investment that adjusts with the movements of the market.