Market Fund

By: EconomyWatch   Date: 3 August 2009

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The money market fund is an open-ended mutual fund that invests primarily in money market securities. The securities preferred by these funds are:

  • Certificates of deposit (CDs)

  • Commercial paper

  • US Treasury bills

  • Bankers' acceptances

  • Repurchase agreements

 

All of these investments have high credit quality and are extremely liquid. Money market funds are short term in nature, with high credit quality. Money market funds are aimed at:

  • Preserving the principal

  • Generating modest dividends gains

 

These funds are also called money funds or money market mutual funds.

 

Features of Money Market Fund
 

Some distinguishing features of money market funds are:

  • They are sponsored by fund companies.

  • They carry no guarantee of principal.

  • They invest in secure and stable investments.

  • They carry a low default risk. However, they still offer a realistic return.

  • The net asset value (NAV) is kept at a steady $1 per share.

  • They have fluctuating interest rates.

  • The minimum requirements are substantially lower than that required for average mutual funds.

  • They can be bought and sold at any time, without any restriction associated to market timing.

 

Types of Money Market Fund
 

Money market funds can be of two types:

 

Retail money market fund: This fund is offered to individuals.

These funds:

  • Comprise about 33% of all money market fund assets.

  • They can be non-government, government-only and tax-free funds.

  • All these funds generate yields that are slightly higher than that from savings accounts.

Institutional money market fund: This fund is marketed to:

·        Corporations

·        Fiduciaries

·        Governments

 

These funds require high minimum investment and are often created to utilize unused funds from any company's operating accounts.

 

How Money Market Funds Work

Just like any othermutual fund, redeemable units of money market funds are issued by fund companies. The issuer is bound to follow the guidelines set by the Securities and Exchange Commission (SEC). The average maturity period of money market funds is 90 days. This period is specified as per the rules established by the SEC. Most of the attributes of a mutual fund apply to a money market mutual fund, with an exception of its net asset value.

 

 


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