Money Market Funds – A safer way to invest your money

2007-03-08 10:33:40

( Financial )



Money market funds is a special type of mutual fund which preserves the principal while giving you modest returns on your investment. The goal of money market funds is to increase your current income that is in line with stability of principal. This is ideal for investors who want to earn income at current money market fund rates but wants to preserve their principal.

Money market funds invests in US government issues, foreign corporate issues, domestic corporate issues, bank obligations, commercial paper, repurchase agreements, and the like. They are also all US dollar denominated and are not Federal Deposit Insurance Corporation (FDIC) insured.

Money market fund has returns that are slightly more than interests paid by bank on demand deposits but less compared to 6-month Certificates of Deposit (CDs). The reason for this is that it is invested in short-term securities (e.g. 30 days) from government and companies that are highly liquid but low risk. There is also no penalty for taking money out of this fund unlike CDs that impose large fees for withdrawing money.

Top money market funds return an average of 4% to 6% a year. It is very secure because it is invested in T-bills. T-bills are government debt securities which are very safe since government can increase taxes to meet its obligations. Also most mutual fund companies have insurances to cover your assets.

Money market accounts are held directly by the issuing mutual fund company. It can be redeemed by mail, telephone or wire. Check writing is also provided. Although this fund seeks to maintain the value of your investment at $1.00 per share, you can lose money by investing in this fund. It also does not guarantee a profit.

Money market mutual funds dividends are also reported daily though payment is made monthly. If you cash in your money market funds in the middle of the month, your cumulative declared dividends will be given from the first month of your investment to the time when you sold out. If you only redeem partially, the dividends declared on the shares sold will simply be part of what you will see at the end of the month. This is partly why the interest income of your funds doesn’t raise the NAV.


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