Money Market Funds: A series of Investment Options

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There's really no rhyme or reason behind it except that the next installment will be about Money Market Accounts and highlighting the difference between the two savings options.
Money Market Funds are required by law to provide a safe and liquid investment while at the same time providing returns slightly higher than a run-of-the-mill passbook savings account.
Even PayPal has a Money Market Fund! In fact, at the end of 2003, money market mutual funds had nearly $2.
39 trillion invested in all mutual funds, according to the Investment Company Institute (ICI), an industry group that represents mutual fund companies.
Although Money Market Funds are not insured by the FDIC, no retailer has ever lost money in a Money Market Fund - which has made Money Market Funds infamous for low-risk investing.
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Different Flavors
There are a number of different Money Market Funds mainly based on the type of short-term investments that are used as well as the amount of the fund that is used to invest in "illiquid" assets in order to try and earn a larger dividend.
The type of underlying investment might not seem very important, but it impacts the yield percentage as well as the taxability of the fund.
Tax-exempt money market funds invest in short-term securities whose income is exempt from federal income taxes, such as bonds issued by state governments and municipalities.
If you're thinking about a tax-free fund take a look at your tax bracket, the state your in, and monitor the yields that are often more volatile in the tax-free funds.
For example, if you are in the 25% income tax bracket, the difference is 75.


Divide the tax-exempt fund's yield by your reciprocal-of-tax-bracket.
8% and your reciprocal-of-tax-bracket is 75, the taxable-equivalent yield is 2.




In other words, you would have to earn a yield of at least 2.


If your tax-exempt fund is also exempt from state income taxes, subtract your combined income tax rate from 100.


Using the same formula.


Short or Long-Term Investment?
Definitely short-term!  Money Market Funds are designed to be highly liquid - meaning that you could cash out in a matter of days.


Potential Risk
Since Money Market Funds are managed in such a way as to minimize risk, the biggest risk involved in investing in Money Market Funds is the risk that inflation will outpace the funds' returns, thereby eroding the purchasing power of the investor's money.

And, as mentioned previously, a Money Market Fund is not a deposit at a bank and is therefore not insured by the FDIC.

The interest of a Money Market Fund is calculated daily, but only paid out at the end of the month unless you sell the fund, then it is paid at that time.


These returns can be compared to the U.
Treasury bill return over the past few years:

BankRate.


Who is this a Good Investment For?
In short, Money Market Funds are great for individuals looking for a safe and liquid short-term investment.
However, you must be aware of the expense ratio so that your interest revenue is not swept away from your brokerage firm.