Reference Library

Investment Planning

Money Market Fund Investments

What is a money market fund?

A money market fund is a mutual fund that invests in short-term debt securities. Like a mutual fund, a money market fund pools investors' assets together in a diversified* portfolio of investments selected by a professional investment manager.

The investments in a money market fund portfolio are often high-quality, short-term debt instruments or IOU's, issued by companies and government agencies that pay an interest rate at a predetermined maturity, or due date.

Most money market funds seek preservation of capital as their primary investment objective. They are able to achieve this goal by maintaining a net asset value (or price per share) of $1.00. Every dollar you invest in a money market fund buys one share of that fund.

*There is no assurance that a diversified portfolio will produce better results than an undiversified portfolio, nor does diversification assure against market loss.

Money Market Mutual Fund Advantages

Current Income

A money market fund may also seek to provide current income, or yield, to investors. This goal is often secondary to the money market fund's primary goal of capital preservation. Yields on money market funds have historically outpaced the yields on bank savings accounts and certificates of deposit, but have fallen below the returns for stocks and stock mutual funds. However, past performance is no guarantee of future results.

Liquidity

Another important characteristic of a money market fund is liquidity. Liquidity refers to the ability of an investor to redeem or sell shares of the fund. Because money market funds allow investors easy access to their money through withdrawals and check writing privileges, they are considered more liquid than bank savings accounts or certificates of deposit.

Preservation of Capital

By law, money market funds can only invest in securities with maturities of less than 13 months, and the average maturity of all the securities in the fund's portfolio cannot exceed 90 days. By holding only short-term debt securities, money market funds are less affected by interest rate changes than bond funds.

In addition, money market funds must be diversified*, and are restricted from investing more than 5% of their assets in a single issuer. It's important to note, however, that unlike deposits in a bank savings account or certificate of deposit, money market funds are not insured by the Federal Deposit Insurance Corporation (FDIC) nor any other government agency.

*There is no assurance that a diversified portfolio will produce better results than an undiversified portfolio, nor does diversification assure against market loss.

Optional Services

Some money market funds offer low minimum initial investments. They also may offer check writing privileges, either for free or for a small fee, that allow you to draw on your money market account easily. You can also easily exchange your money market mutual fund to stock or bond mutual funds within the same fund family which makes investing easy and convenient.

Why invest in a money market fund?

The reasons for investing in a money market fund are as varied as investors themselves. But typically investors choose money market funds as:

A solution for short-term goals

Stocks are a poor choice for short-term financial needs because stock prices and performance fluctuate daily. The price stability and liquidity offered by money market funds help ensure that your money will be available when you need it. And unlike bank savings accounts, the returns provided by most money market funds tend to stay ahead of inflation.

A "parking place" for investor capital

During periods of stock market weakness, some investors choose to "park" their investment dollars in the "safe harbor" offered by money market funds. When stock market conditions improve, investors can easily access money market fund assets and reinvest those dollars in the equity markets.

A part of an overall investment plan

Many investors prefer to invest in the higher yields that money market funds provide versus bank savings accounts because of the potentially higher yields available at only slightly more risk.

An investment in a money market fund is not insured or guaranteed by the FDIC or any other government agency. Although a money market fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the fund.