What is a Money Market Fund
A money market fund is also known as money market mutual fund which is a type of mutual fund to maintain highly liquid instruments like cash, securities, and invest in short term debt securities. They provide high liquidity with low risk. The actual loss is quite rare.
A money market fund and money market account may sound similar but they are not the same. A money market fund is managed by an investment company without any guarantee of principal, whereas the other is a saving account with interest which is offered by financial institutions. They have a definite transaction advantage and are insured by a federal deposit.
They are not as safe as cash, but money market funds are a highly low-risk investment scope. So, it produces income like taxable or tax-free income based on its portfolio with a little capital. They are generally used to keep money temporarily before investing. They are not suitable for long term investments.
How a Money Market Fund Works
A money market fund or money market mutual fund works similar to other mutual funds but varies briefly. They follow the guideline offered by the financial executives and issue amendable shares to investors.
Money market mutual funds invest in
- Short term debt managed by a commercial bank, known as Bankers’ Acceptances (BA)
- Bank issues certificate with short term maturity called Certificates of Deposit (CDs)
- Short term government securities such as repurchase agreements (Repo)
- Short term government debt issue i.e. U.S. Treasury.
The outcomes for return totally depends on the market-rate interest.
Types of Money Marketing Funds
Depending upon the invested assets, maturity period, and other aspects the money market mutual fund is classified into the following:
- A government money fun with 99.5% of total assets in cash, repurchase agreement and securities which are collateralized by government securities.
- Tax-exempt money that provides earning and is free from the income tax department
- A Prime money fund invests in floating-rate debt and commercial paper of non-reasury assets, similar to the corporations
- A Treasury fund issues debt securities like bills, notes, and bonds.
Pros and Cons of Money Market Funds
The main focus of money market mutual funds is to offer a safe channel through which they can invest easily with security and also accessibility. They are a type of mutual fund with extremely low risk and low return. Moreover, the investor may choose to park the cash in these funds for a short-term period. They are not suitable for long-term periods like retirement, as they don’t provide much capital appreciation.
They are not regulated by the federal deposit insurance like every other investment security. An investor may face issues since the money market mutual funds are prone to investment rate fluctuations and monetary policy. Shareholders may withdraw money to a certain limit.
Conclusion
When it comes to money market funds, they are appreciable for a short-term period, and before investing in such type of mutual funds read the prospectus and guidelines. The documents state the risks, costs, and other details of the fund.
