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What Are Money Market Funds?

Are you looking for an investment option for a short period of time? Well, money markets might be the right option for you then.

What is a money market fund?

Money markets provide investors with stable income and are managed to maintain a stable share price. Due to their stability, they are used for cash reserves or for the instant money needs.

Money Market Funds invest in a short term, high-quality, fixed-income securities like short-term bank certificates, Treasury bills, commercials issued by corporates. The maturity period of a mutual fund’s portfolio should be 90 days or less on an average to help you protect against interest rate risk. The income which the Money Market Funds provides is determined by short-term interest rates.
Let us take an example how money market funds work.

George is a recent college graduate. He wants to save up for a trip to Europe in 12 months. Since his time is short, he chose to invest in Money Market Funds. Since they are short term, the investment is done for a limited period of time.
If George needs his amount before the investment time has ended before 1 year, the Money Market Funds has an option to sell the fund. This will provide a shorter profit to the investor.

Types of Money Market Funds

There are two main types of money market funds that one should know about:

Institutional Money Market Funds

These Money Market Funds are held by the government, business, institutions etc. A huge amount of money is parked in Institutional Money Market Funds. These kinds of funds include hedge funds, pension funds, insurance companies and investment advisors. The Institutional Money Market Funds set a high initial investment amount. In order to compensate for the large investment, the fund companies charge low fees.

Retail Money Market Funds

These kinds of funds are used to park the money on a temporary basis. This comprises of short-term debts, treasury bills, etc. Retail money market mutual funds are open to all investors. These can be bought directly or with the help of a fund manager.

Advantages of Money Market Funds

Money Market Funds are special for 3 major reasons

  • Low initial investment

Money Market Funds has low requirements which are lower than a general mutual fund minimum requirements. The Money Market Funds allows an investor to take advantage of the safety related to money market investment at low investment amounts.

  • Safety

The securities in which they are invested are generally some of the most stable and safe investments. Money Market Funds carry a low default risk and offer a reasonable return.

  • Accessibility

Money Market Funds can be bought and sold at any time and carry check writing privileges. The Money Market Funds offers the same-day settlement, unlike other fund options which take 3 days.

Things to consider before investing with Money Market Funds

Before investing in Money Market Funds one must take care of the following details.
The expenses in the Money Market Funds
Since the returns are low, a higher expense ratio will take up the returns. Hence, one must consider everything before investing with Money Market Funds.
Finally, there are two things that an investor must always take into account before choosing any fund. They are:

Aim of the Investment

If you are considering Money Market Funds for retirement option, the Money Market Funds
Might not be an appropriate option. The returns on these are generally higher it might not be an adequate option. Instead, it should be used to accumulate money on a temporary basis for an anticipated expense soon.

Risk Factors

The Money Market Funds are risk-free but it is not absolute. It happens that the Money Market Funds fail to return the investor with principal amount. Hence, always consult with the fund company before investing in Money Market Funds.

So go ahead and start making your mutual fund investment.

 

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