Investors use money market funds for a variety of reasons.  One of the primary benefits of money market funds is that they offer safety, liquidity and desirable yields.  The safety component is threefold.  First, money market funds are highly regulated and must invest the money held for their investors in short term dollar denominated debt securities or money market instruments that are of exceedingly high quality.  Second, money market mutual funds must invest in securities that are government issued or have top tier rating by one of the national rating companies.  Lastly, the regulations further stipulate that the money market fund cannot overweight their investments by placing a significant portion of the funds money in one type of security.

Money market instruments, by definition, are short-term investments that generally mature in less than a year and have an active secondary market in which they can be resold.  Money market funds provide a fairly significant level of stability as they are managed to maintain a constant $1.00 net asset value (NAV) per share, and they have an average portfolio maturity of 90 days or less.

Money market funds are also considered very liquid investments.  Like other mutual funds, money market fund shares can be bought or sold at any time.  This means you can take money out of your account on relatively short notice.  There is also no penalty for taking money out of your money market fund, unlike banking instruments such as certificates of deposit that can impose fees for early withdrawals.  Money market funds also often provide check writing privileges for the accountholders.  The accountholder can write checks from the account, or make transfers to your bank account electronically or by mail.  Because of the liquidity, many people use the money market mutual fund as the savings place for their emergency funds, which are generally three to six months worth of income.  An added value that can make money market funds desirable is they don’t require a high minimum deposit.  The low minimum deposit requirement makes them a great source of savings for emergency funds as well as the start of a diversified investment strategy.

Some investors use money market funds as a temporary parking place for cash between investments because the money funds yields are typically competitive with those of most savings accounts.  Most investors who put cash in money funds use them as part of their overall investment strategy or as a savings account alternative.  For example, some people equate  money funds to the higher yielding substitute of savings accounts offered at banks and thrifts.  A number of investors use money market funds to hold cash between investments because their yield is competitive with many savings accounts.  These investors keep some cash in money funds because they know the principal is safe and they can withdraw their money at any time and reallocate the funds to other investments as the markets change and fluctuate.  When the market opportunity does change they may place the bulk of their investment money in other types of mutual funds for long-term growth.

Because money market mutual funds invest in many government-backed securities including local municipal debt obligations, investors may enjoy some tax benefits on the returns provided by a money market fund.  For those in higher tax brackets, municipal money market funds can provide state and federal tax-free income.  The combination of returns, safety and liquidity makes money market funds an ideal place for an investor to park a large chunk of money on a short-term basis-such as when she’s researching a new investment.

Money market funds are most appropriate for short-term investment and savings goals or in situations where you seek to preserve the value of your investment while still earning income.  In general, money market funds are useful as part of a diversified personal financial program that includes long-term investments.

Money funds provide the benefit of pooled investments, as investors can participate in a more diverse and high-quality portfolio than they otherwise could individually.  And like other mutual funds, each investor buys into a money fund is considered a shareholder of the investment pool, a part-owner of the fund.

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