Money Market Funds (MMF) Explained.
Money market funds are intended to offer investors high liquidity with a very low level of risk. Money market funds are also called money market mutual funds.
They’re kind of like a combination of banks and mutual funds but not quite. Money market funds, they also offer investors the right to withdraw their money anytime, but they mitigate their liquidity risks by restricting their investments to short-term, high-quality assets and cash equivalents like Treasuries.
A savings account may not be the best option if you have a large amount of cash that you don’t plan on needing soon. Although savings accounts pay interest, it’s not always as high as other options. Also, if you want to have money available to take advantage of investing, a money market fund is best.
Their aura of safety has made money-market funds widely used by everyone from corporate treasurers to households as easily-accessible places to put short-term cash while typically getting better interest than in a bank account. Of the roughly multi-trillion in money-market funds currently, almost known as prime funds that are an important force in the so-called commercial-paper market that’s crucial to the daily functioning of companies and financial firms.
Pros of a Money Market Fund:
The cash in your MMFs can be used easily to make investment purchases in your brokerage account.
They often have less risk than other investments.
They often generate a return for investors. The return may not be as high as investing in the stock market, but MMFs are less risky and still typically have better returns than an interest-bearing savings account.
MMFs provide some of the convenience of a savings account, and allows you to write checks and easily transfer money.
Cons of a Money Market Fund:
When interest rates are very low, MMFs may not pay more interest than a savings account once you take fees into account.
Money market mutual funds are not usually FDIC insured. This means although money market mutual funds may still be considered a fairly safe place to invest money, there is still some risk involved.
Money market mutual funds also may have a minimum initial investment, as well as balance requirements, management, and transaction fees.
Prime money-market funds exist because they offer better returns than holding cash or Treasuries.
A money market fund is a type of mutual fund that invests in high-quality, short-term debt instruments, cash, and cash equivalents. Though not quite as safe as cash, money market funds are considered extremely low-risk on the investment spectrum. A money market fund generates income (taxable or tax-free, depending on its portfolio), but little capital appreciation.
Money market funds should be used as a place to park money temporarily before investing elsewhere or making an anticipated cash outlay; they are not suitable as long-term investments.
Today, money market funds have become one of the core pillars of the present-day capital markets. For investors, they offer a diversified, professionally-managed portfolio with high daily liquidity. Many investors use money market funds as a place to park their cash until they decide on other investments or for funding needs that may arise in the short-term.
The interest rates that are available on the various instruments that constitute the portfolio of a money market fund are the key factors that determine the return from a given money market fund. Looking at historical data is enough to provide sufficient details on how money market returns have fared.