This article is about Money Market Funds (MMFs) in the United States, i.e. MMFs regulated by the U.S. Investment Company Act of 1940. Please note that investment schemes marketed as Money Market Funds in other jurisdictions can differ significantly from the type of investment described in this article.
Why put your money in a Money Market Fund?
Money Market Funds are typically sought out by investors looking for a low-risk investment with high-liquidity. MMFs can for instance be used to balance risk an investment portfolio or to hold money that the investor want to be able to cash out quickly if needed.
Some people use MMFs as an alternative to just leaving the money in a bank account, but before you do this please consider that federal deposit insurance doesn’t cover the money you have in an MMF. Not having federal deposit insurance increases the risk of the investment and may be a deal-breaker if you are looking for a super low-risk way of keeping your money.
Low yield
The low risk and high liquidity of the MMF does of course come with a downside in the form av low yield. The safety and convenience of the MMF must be weighed against the risk of not growing the capital by much over time. Putting all your retirement savings in an MMF can for instance make it difficult to grow the capital enough to secure a comfortable retirement.
How?
If you want to purchase shares in a Money Market Fund, you can contact a bank or a brokerage firm. Purchases can be made online or offline.
Composition
A Money Market Fund will usually consist of short-term securities, and by that we mean securities that mature within 397 days or less. Typically, the weighted average portfolios maturity is three months or less. High credit quality is also important to MMFs and many of them only purchase very highly rated debts (AAA). To decrease risk even further, MMFs are known to diversify a lot and never invest more than a few percent in an individual issuer (except for highly rated governmental issuers).
Many MMFs invest heavily in monetary instruments and high-quality high-liquidity debts. Certificates of Deposit, short-term municipal bonds and short-term corporate commercial paper are popular choices for MMFs, and so are T-bills which are a type of security issued by the U.S. Treasury. MMFs like to invest in assets that allow the MMFs managers to quickly adjust to changes in interest rates.
Loads or no loads?
Loads are fees charged by a mutual fund when the investor enters and/or exits the fund. Some Money Market Funds charge loads, while others are no-load MMFs. Before you invest in an MMF, always check if there are any loads, when they are charged and how they are calculated.