A money market fund is a professionally managed mutual fund which invests in highly liquid securities usually called money market instruments such as U.S. Treasuries, CDs or Certificates of Deposit or repurchase agreements. On average the maturity of money market securities is around 90 days. These funds share similarities to mutual funds with a notable exception on NAV (net asset value).
Sometimes these funds are confused with money market accounts. The biggest difference is that with money market funds you don’t have any guarantees on your principal. You can lose money. Since your money is in relatively safer investments you are not likely to lose much if any. On the other hand, money market accounts are insured by FDIC or Federal Deposit Insurance Corporation to the amount of $250,000 or more depending on the account type. An important point to note is that this limit of $250,000 has been increased from $100,000 during the later half of the year when the financial crisis of 2008 was at its peak. These limits hold till December 31, 2009 but there is a chance that this time frame will be extended. If you are opening such an account please confirm whether the specific account is insured by the FDIC and to what limit.
Lets get back to money market funds. You must be wondering – what are their advantages? There are three big ones:
a) Smaller investment requirements – the really neat thing about these funds is that they invest in securities or other financial instruments that require large investments. So, if you were to go out on your own, it might be harder for you to own the underlying financial instrument. Its much easier to own shares of the money market fund. Don’t forget, you also don’t have to worry about managing the investment allocation. You just have to do your due diligence while picking the money market fund. After that, you just put you just buy the shares and forget about it.
b) Stability and Safety – these funds invest in the safest investments out there. Due to low risks involved your returns might not going to be as high as they would be in other growth-oriented mutual funds. But, since this is your safety bucket i.e. you are not willing to risk losing this money stability takes a higher priority over rate of return.
c) Easy Access – the shares of these funds can be bought and sold relatively quickly without the need of timing the markets. Usually most funds provide same-day settlement so your money is available to you the same day similar to a checking or savings account.
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