Investing in Money Market Funds

  

Investment in money market funds is a very low risk investment tool. It is the most liquid form of investment too.

The following are the advantages of money market funds :

  

Investment in money market funds is a very low risk investment tool. It is the most liquid form of investment too.

The following are the advantages of money market funds :

• The goal of any money market instrument is to provide short term income coupled with stability.
• The money market funds offer the lowest risk of principal loss.
• The return on the money market fund is fixed although it has short maturity periods.
• The money market instruments are generally of very high denominations which is not affordable to the personal investors. But money market funds have very low purchase requirements. Hence instead of spending sleepless nights in worrying about the cash that would be required , the money market funds impart security only.
• Hence if one is looking for liquidity, capital preservation or periodic income source, then money market funds are the best place to invest in.
• The money market funds have fixed Net Asset value . The Net Asset Value is generally tied at $1 per unit. Just like other money market instruments, the money market funds have same day settlement system.
• The following are the disadvantages of money market funds :
• The investment in the money market funds is not backed by the Federal Deposit Insurance Corporation or any other government body.
• The yields from investing in the money market funds may not adjust with inflation rates.
• The yields are low when compared to the other investment options.
• There is possibility of money loss by investing in the money market fund .

The money market fund is a type of mutual fund that is invested in money market instruments only. The money market instruments are:

• Treasury Bills
• Certificate of deposit
• Commercial paper
• Bankers’ Acceptance
• Euro Dollars
• Repos

The Net Asset Value o f the money market fund is calculated on a daily basis. The money market funds are definitely low risk ones but still they do not have any government backing. The stability of the money market fund depend on the investments in the portfolio that comprise it.

Types of Money Market Funds

There are two types of money market funds and each of them is discussed under the following heads:

Taxable Funds

For the taxable money market funds the returns are subject to local,state and federal taxes. Tye portfolio of the taxable funds comprise of the U.S Treasury securities, Repos, Commercial Paper and bankers’ acceptances.

Tax-free Funds

Unlike the taxable funds the tax free funds do not invest in a wide variety of money market instruments. They generally invest in short term debt obligations that are issued by the federal tax exempt units. The tax free funds generally generate very low yields. There are also tax free funds that are exempt from state and local taxes, but these funds are not the general norm but exceptions to the rule. Hence a thorough investigation of such tax free funds may be conducted before investing.

For more details on money market funds the important websites that may be viewed are investopedia.com, oppenheimerfunds.com, vanguard.com, money.aol.com, bankrate.com etc.