Mutual funds make saving and investing simple, accessible, and affordable.  The advantages of mutual funds include professional management, diversification, variety, liquidity, affordability, convenience, ease of recordkeeping and strict government regulation, full disclosure and accountability.

There are three basic types of mutual funds, stock or equity funds, bond funds, and money market funds.  These categories and their investment objectives may be further subdivided to a multitude of groups and subcategories of funds.  Stock mutual funds invest primarily in shares of stock issued by U.S. or foreign companies.  Bond mutual funds invest primarily in bonds, whether they are corporate bonds, municipal bonds or U.S. government bonds.  Money market mutual funds invest mainly in short-term securities issued by the U.S. government and U.S agencies, U.S. corporations, and state and local governments.

A mutual fund is a company that invests in a diversified portfolio of securities.  People who buy shares of a mutual fund are its owners or shareholders.  Their investments provide the money for a mutual fund to buy securities such as stocks and bonds.   A mutual fund can make money from its securities in two ways: a security can pay dividends or interest to the fund or a security can rise in value.  A fund can also lose money and drop in value by the loss of value in its underlying securities they have invested in.

Money market funds have become key product of the investment options offered by mutual fund groups and brokerage companies.  Money market mutual funds have had substantial asset growth from the mid 1980’s to the present.  The exceptional growth of money market mutual funds was predominantly the result of two market forces.  A considerable portion of money market mutual fund growth was the overall growth of the mutual fund industry.  In addition, in the late 1980’s the interest rates offered on money market mutual funds far eclipsed any of the rates available on comparable bank products.

Investors will often use money market funds for the relatively high interest rates as well as a parking place for cash reserves awaiting investment in longer-term financial assets such as stocks and bonds.  Money market funds are used to frequently exchange money market funds shares for the shares of other funds in their mutual funds group.  An investor who holds more than one mutual fund type from a single fund company may occasionally want to transfer assets from one fund to another to change asset allocation.  However, if an investor wants to sell a fund before deciding on another fund to purchase or wants to hold their investment activity, the money market mutual fund that is part of the same fund company can be a convenient place to hold the money from the liquidated mutual fund.  At a later date, the investor can use the money market mutual fund holdings to purchase shares of the other funds in the same fund family.  That same investor may also simply wish to park the money in the money market fund in order to have access to the money for upcoming expenditures as well.

Money market funds are also generally the main conduit in cash management accounts offered by most large brokerage firms.  To provide added services to their clients, brokerage firms use money market mutual funds to provide cash management services.  Placing the client’s available cash into money market mutual fund instead of a non interest bearing account will earn that brokerage client an additional return on their funds.

Money market fund assets account for approximately one quarter of all mutual fund assets.  As of December 2007, there was over $3 trillion invested in money market funds.  Stock funds, by comparison, account for about one half of all mutual fund assets that year which was roughly $6 trillion in financial assets.

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