What Are Money Market Mutual Funds

Money market mutual funds are a type of mutual fund that invests in high quality, short-term debt instruments including government securities, certificates of deposit, asset-backed commercial paper and other highly liquid securities short term corporate debt.   Like all mutual funds, money market mutual fund portfolios are professionally managed and a management fee is charged against fund assets to cover this expense.  Money market mutual funds are highly liquid and have historically earned a slightly higher interest rate than comparable savings investment vehicles such as bank savings accounts.

Given that these funds invest in high quality, short-term investments where the average maturity of securities in their portfolio are less than one year and are often investments in securities backed by U.S government, money market mutual funds offer market based rates and can be swift to react to changing conditions.  Within the spectrum of mutual fund investing, money market funds entail the least risk, as well as lower rates of return.  A money market fund is required by law to invest in low-risk securities to maintain a stable value and insure liquidity. Money market mutual funds try to preserve their value and are considered to be highly liquid, cash equivalent investments. 

Money market mutual funds are operated primarily by brokerage companies and mutual funds groups which sell shares in these funds to a wide variety of individual, corporate, and institutional investors.  Money market mutual funds can be purchased directly from investment companies or with the assistance of financial advisors.  The minimum initial deposit is set by individual investment firms and can range from $250 to $25,000.  Money market mutual funds often allow the account holders to write checks against their balances.  Some funds will charge for this service and there maybe limits to the amount of checks that can be written.

Since money market mutual funds are mutual funds that invest in an assortment of short-term debt instruments, they provide the implicit benefit of pooled investments.   The money market mutual fund investors are participating in a more diverse and higher quality portfolio than they otherwise could accomplish individually.  Similar to other mutual funds, each investor who invests in a money fund is a shareholder of the investment pool.

Money market funds are similar to bank savings account with comparable levels of liquidity and market based interest rate returns.  Money market mutual funds should not be confused with money market deposit accounts or other FDIC insured bank products.  The names of some of the products may be similar, but they are completely different investment products.  A money market fund is a type of mutual fund.  It is not guaranteed or FDIC insured.  When you buy shares in a money market fund, you should receive a prospectus.  In fact, many banks now sell mutual funds, some of which carry the bank’s name.  Money market mutual funds sold in banks are not bank deposits.  As a result, the Federal Deposit Insurance Corporation (FDIC) does not federally insure them.  A money market deposit account is a bank deposit. It is guaranteed and FDIC insured. When you deposit money in a money market deposit account, you should receive a Truth in Savings form.  Mutual funds are not guaranteed or insured by the FDIC. 

The return from a money market mutual fund comes in the form of a dividend.  The manner in which they pay interest reinforces there similarity to bank products and money market deposit accounts.  In fact for some investors, money market mutual funds are very similar to a bank certificate of deposit.  The advantage of a money market mutual fund is that it is completely liquid.  Unlike a bank CD, which will lock up your money for a period of three months or significantly longer if you can sell your shares in a money fund at any time.  They also often offer perks like the ability to write checks against the principal.  The advantage of a bank CD is that your deposit is completely insured by the federal government as long as the deposit amount stays within the FDIC insurance limits.

This entry was posted on Tuesday, January 6th, 2009 at 3:46 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.