The Basics of Money Market Investing

A money market fund is a mutual fund that invests in the “money markets” with the purpose of providing a low-risk way of investing while making the funds easily accessible to investors. Typically, shares of money market funds can be bought or sold at any time and the account often provides check-writing privileges. For many investors, money market funds provide a temporary account for their cash. Typical investments of a money market fund might include U.S. Treasury issues, CDs, and short-term commercial paper

In contrast to a savings account, money market funds can be easily moved with no waiting for a transfer to take place.
And while CDs sometimes offer better rates, they aren’t readily accessible at any time without penalty.

Money market funds seek to limit investor exposure from losses due to market risks and are regulated by the Securities and Exchange Commission’s (SEC) Investment Company Act of 1940. Money market funds seek a stable $1.00 net asset value (NAV). If a fund’s NAV drops below $1.00, that the fund “broke the buck”.

The money market, which refers to the market for short-term borrowing and lending, provides short-term liquidity funding for the global financial system. The money market is the market where short-term obligations such are bought and sold. The core of the money market is the activities of the banks borrowing and lending to each other. These instruments are often benchmarked by the London Interbank Offered Rate (LIBOR) for the applicable term and currency.

While money market funds are often touted as the safest type of mutual fund, their returns are so low that they can’t beat inflation over the long-term. Over time, your money loses its buying power and so actually becomes less valuable.

There are various types of money-market funds available, based on the type of securities they purchase. The most important distinction among these is whether or not the dividends they provide are taxable.

________________________________________________________________

The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

« A Monthly Budget and Spending Analysis Calculator | Home | Large-Cap Stock Investing »