What are money market funds? (2024)

FAQs

What is an example of a money market fund? ›

Types of money market funds

Investments can include short-term U.S. Treasury securities, federal agency notes, Eurodollar deposits, repurchase agreements, certificates of deposit, corporate commercial paper, and obligations of states, cities, or other types of municipal agencies—depending on the focus of the fund.

A money market fund is a type of mutual fund that invests in high-quality, short-term debt instruments, cash, and cash equivalents. Though not quite as safe as cash, money market funds are considered extremely low-risk on the investment spectrum.

All investments carry risk. However, money market funds are still considered one of the safest investments available to retail investors, and the numerous SEC rules and reforms passed have made them safer.

Mutual funds and money market funds are both pools of money invested by professional money managers. There are thousands of mutual funds available, and their risks vary widely from blue-chip conservative to highly speculative. A money market fund invests only in low-risk short-term debt such as Treasury bills.

Money Market Funds

Ultra-conservative investors and unsophisticated investors often stash their cash in money market funds. While these funds provide a high degree of safety, they should only be used for short-term investment. There's no need to avoid equity funds when the economy is slowing.

You can withdraw your cash at any time without penalties. Higher-yielding than savings at traditional banks.

Money market funds are usually considered to be safe investments, but it's important to remember that these investments are intended for the short term. With maturities of 13 months or less, the funds stay liquid and allow you better access to your money than longer-term investments.

There is no direct way to lose money in a money market account. However, it is possible to lose money indirectly. For example, if the interest rate you receive on your account balance can no longer keep up with any penalty fees you may be assessed, the value of the account can fall below the initial deposit.

What is better than a money market fund? ›

Alternatives to money market funds, money market accounts, and savings accounts include: Certificates of deposit: CDs are term-based savings accounts that lock up your funds for a set time period in exchange for higher interest rates.

U.S. government money market funds are typically regarded as the safest of the three, and within that category, those with a high concentration of Treasuries—with full government backing—would be exposed to a lower likelihood of default risk.

Money market funds are divided into two categories: taxable and tax-free. If you're buying a taxable fund, any returns from the fund are generally subject to regular state and federal taxes.

Investors can purchase shares in money market mutual funds directly from brokerage companies or mutual fund firms, just as they would purchase shares in a stock or equity mutual fund.

For example, the Rule of 72 states that $1 invested at an annual fixed interest rate of 10% would take 7.2 years ((72 ÷ 10) = 7.2) to grow to $2. In reality, a 10% investment will take 7.3 years to double (1.10^7.3 = 2).

A market can be described as a money market if it is composed of highly liquid, short-term assets. Money market funds typically invest in government securities, certificates of deposit, commercial paper of companies, and other highly liquid, low-risk securities.

While the term “money market IRA” may suggest that it's a different type of retirement account, money market accounts are actually held within a regular IRA account. In this way, you can think of a money market account as another type of investment you can choose within your traditional IRA, Roth IRA or 401(k).

Cash fund features

Cash, or money market funds, offer you a relatively low-risk means of investing as they hold a range of cash and cash-like investments.

A money market account is a type of account offered by banks and credit unions. Like other deposit accounts, money market accounts are insured by the FDIC or NCUA, up to $250,000 held by the same owner or owners. Money market accounts tend to pay you higher interest rates than other types of savings accounts.