A money market fund is an open-ended mutual fund that invests in short-term debt securities such as Treasury bills and commercial paper.
A money market fund is a kind of mutual fund that invests only in highly liquid instruments: cash, cash equivalent securities, and debt-based securities with a short-term maturity of less than 13 month and high credit ratings. Consequently, these funds offer high liquidity with a very low level of risk. Money market funds are widely regarded as being as safe as bank deposits yet providing a higher yield. Money market funds are offered to investors who were interested in preserving their cash and earning a small rate of return.
Although they sound very similar, a money market fund is not the same as a money market account (MMA). The former is an investment, sponsored by an investment fund company, and hence carries no guarantee of principal while the latter is an interest-earning savings account offered by financial institutions, with limited transaction privileges and insured by the Federal Deposit Insurance Corporation(FDIC).
Advantages of investing in money market funds
- It’s a safe place to keep money:
When the stock market is very volatile and investors are not sure where to invest their money, the money market can be a haven. Money market accounts and funds are often considered to have less risk than their stock and bond counterparts because they invest in low-risk vehicles such as certificates of deposit (CDs), Treasury bills (T-bills) and short term debts.
- They can be easily liquidated
Money market funds don’t generally invest in securities that trade very small volumes or tend to have little following. Rather, they mostly trade in entities and/or securities that are in fairly high demand (such as T-bills). This means they tend to be more liquid; investors can buy and sell them with ease.
Disadvantages of investing in money market funds
- When interest rates are low, they may pay less than the rate of inflation. When that happens, fund investors are actually losing their purchasing power. However, many cannot afford to take the risk required to stay ahead of inflation, such as stocks, corporate bonds or high yield mutual funds.
- Unlike bank’s money market accounts, they are not insured by the Federal Deposit Insurance Corporation.