Individual Money Market Fund Choices

One of the first steps to choosing a money market mutual fund is selecting the category of money market fund.  When identifying the type of fund to invest in the main category delineations are whether to invest in are taxable and tax exempt money market funds.  Tax exempt money market funds can be further evaluated based on whether the fund holds federally tax exempt investments or state specific tax exempt investments.  In addition, a taxable money market mutual fund can be viewed by those funds that invest in only federally guaranteed obligations or any general money market instrument.  The choices for the retail money market fund investor is commonly narrowed down to these categories: general tax exempt money market funds, state specific money market funds, general taxable money market funds, government only money market funds and prime money market funds.

Once the category of money market fund is selected the choice of fund company must be selected.  The first consideration should be the fund services.  A prospective money market fund investor should identify the fund services that are important to them and check to make sure the fund they are selecting offers these features.  Almost all money market mutual funds are no-load mutual funds in which investors purchase and redeem shares without paying a sales charge.  Make sure to review that this is the condition with any money market fund being considered. Other money market fund services to consider are the other funds offered by the mutual fund company offering the money market fund.  Most mutual funds allow existing investors to exchange shares of one fund for shares of another in the same fund family for a low or no charge.  Additional services provided by money market fund sponsors may include automated information and transaction options, electronic transfers, automatic investment and withdrawal plans, retirement plan options, and check writing.

After determining the type of money market fund and the money market fund company, the next move is to look at the interest rate as a barometer for comparison between money market funds.   This is the amount of interest income that is paid out of the fund’s investment on an annual basis. This is the annualized interest per year and due to the nature of the funds having a variety of short term investments, this number will change over time.  Often, the rate of return will rise and fall rather significantly when short term money market rates are rising or falling measurably.

A phrase that was initiated by the SEC, a fund’s past performance does not necessarily predict future results, should not be taken lightly.  Although it is relatively simple to view a money market mutual funds present or historical yield, it is entirely different to try and determine what the return will be in the future.  Just because a fund had excellent performance or yield last year does not necessarily mean that it will duplicate that performance.  A fund’s past performance is not necessarily indicative of where it may be in the future, however for short term trends this approach is quite acceptable and reasonable.  Market conditions can change and this year’s best money market fund might drop measurably over time. 

Though it may important to note that mutual funds compete vigorously to keep costs low especially in the arena of money market mutual funds to the extent that absorb certain fees to produce better results, there is no guarantee this process will continue in the future.  The rate of return figures of money market funds reported by the fund are produced after all fees and expenses have been deducted.  The money market fund returns published in journals and online are technically net of any fees the fund charges.  Any time the choice is made between money market funds, the past performance automatically reflects the impact fees have had on the money market funds return in the past.

Because confidence in money market mutual fund has become a key issue in the money markets today is investor confidence.  When it comes to investing in money market funds bigger funds and fund families may be better.  During this period of uncertainty, it may be prudent to make sure your money market account is with a large, diversified money management company that would have the resources to make you whole, even if its funds ran into trouble.

When searching for the right money market fund potential investors should not under estimate the value of mutual fund company’s web sites.  Numerous mutual fund companies have websites that offer information about their funds seize, expenses, current yield as well as educational tools and materials for investors.  Either on the prospectus or through the money market fund family website additional information that can be reviewed and that may impact the selection of a specific money market fund include; portfolio composition, risk characteristics, the duration and weighted average maturity of the mutual fund, the performance history relative to appropriate benchmarks, total expense ratio, strategies, and portfolio policies.

This entry was posted on Tuesday, January 6th, 2009 at 1:18 pm and is filed under Mutual Funds. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.