Money market mutual funds are one of the easiest ways for investors to access the money markets. It is important to understand the basics of money market funds to use them correctly in your portfolio. You should have a basic understanding of treasury bills, commercial paper, bankers’ acceptances, repurchase agreements, and CDs because that is what makes up the majority of the money market mutual funds. When you understand how money market funds work and how they can benefit you, your investments may make more sense.
The Difference Between Money Market Funds and Accounts
One of the major differences between cash and CDs and money market mutual funds are that money market mutual funds are not insured by the FDIC. So, although the risk is small, there is always a risk that you can lose money as an investor. Money market mutual funds are sponsored by fund companies and bring no guarantee of principal. Money market accounts, on the other hand, are interest-earning savings accounts. They come with limited transaction privileges and are insured, up to a certain limit, by financial institutions. Historically, money market accounts used to offer higher interest rates than passbook savings accounts. Recently, both Money market accounts and passbook savings accounts offer pennies in interest.
Why Investors Want Money Market Mutual Funds
Money market mutual funds may be beneficial to you in three cases.
They offer a great place for cash reserves when an investor is not ready to fully invest their money or is expected to use cash for a non-investment purpose in the future. They offer some safety and liquidity. They are relatively secure funds, with interest, that can be withdrawn without penalty when the owner chooses.
We frequently use money market funds to hold cash that is allocated to buy limit orders of stock. These computerized buy orders will only execute when the market declines.
Similarly, when we take profits on a position, or decide to sell a weak underperforming stock, the cash proceeds are directed to the money market. In this way we may make some interest while waiting to fill the next investment position.
How Do Money Market Mutual Funds Work?
The initial investment required may be from $500-$5000. Shares can be purchased directly from brokerage companies or mutual fund firms. Some banks also sell money market funds through their investment advisors. Money market mutual funds offer simple withdrawal features, similar to a bank or trust account. Withdrawals can be made by writing checks or requesting payment by mail. Check writing withdrawals can be set to a minimum of $500. Investors may also request payment through a wire transfer to their bank account. The bottom line when it comes to money market mutual funds is that they are easy to use. They are also very liquid. Money market mutual funds offer modest investment requirements and provide simple withdrawal features. And, when you choose the right fund, you may also benefit from tax-exemption from federal, state, and even local taxes. Now that you understand the basics, talk to your portfolio management advisor about taking the next steps to securing this investment.