Money Market Funds 101

August 13, 2008 · Posted in Money 

Money market funds are a very popular choice for investors across the country. These funds have been around for over 30 years, and offer benefits and advantages that standard accounts like savings, checking or certificates of deposit are unable to offer.

Money market funds are a kind of mutual fund for investing in short term debt securities. The agencies that your money market fund may invest in include banks, corporations, and the United States government. By “short term,” we mean less than a year, and the shares in your money market fund will be fixed at one dollar each.

Unlike certificates of deposit, there is no early withdrawal fee or penalty for taking your money out before the term expires. You can withdraw funds from it on short notice without suffering any penalties, and you can even write a certain number of checks a month that use your money market account’s funds. Interest on your money market funds will be calculated daily, and paid out at the end of the month. If, however, you sell the fund entirely before the end of the month, the interest will be paid out immediately.

If you plan to make a large purchase, such as a house or new car, a money market fund is a great place to put your money while you’re saving up. The interest rates your money will accrue will rival the usually high interest rates of a certificate of deposit, but because there are no penalties for taking the funds out, they are a much safer bet. Additionally, you run very little risk of losing your investments entirely, since money market funds generally invest in things like Treasury bills, also known as t-bills, which are government bonds issued by the United States Department of the Treasury. Any government based investment is likely to be very safe, since the government can raise taxes in order to meet its debt obligations. And though money market funds are not covered by the FDIC (Federal Deposit Insurance Company), most companies that handle mutual funds carry insurance of their own that will protect you.

All of these factors combine to make money market funds a good place to invest your money. Low risk, high yield and flexibility are all things that any smart investor should be looking for when it comes to finding a successful method of investing their funds, and money market funds have them all in spades.


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