What Is a Money Market Mutual Fund?
A money market mutual fund is a type of investment that buys short term debt obligations from highly rated companies and reliable government agencies. They provide a relatively low rate of return but expose investments to an extremely low risk of losing principle. Money market mutual funds are often used as a place to store cash when it is not being used for more aggressive investments.
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Identification
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Money market mutual funds invest in things like certificates of deposits, commercial paper and treasury bills. These short term debt obligations produce a small return. This is usually between two and five percent. The low rate of return is a trade off for keeping the investment principle very safe. Money market mutual funds are open ended investments. This means money freely enters and exits the fund without penalty.
Function
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Each money market mutual fund invests differently, so each one has a different interest rate. Investors can compare these rates when deciding which money market mutual fund to invest in. However, the interest rate fluctuates and past performance is no guarantee of future return. The interest rate usually moves in the same direction as the prime rate of the Federal Reserve Bank.
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Features
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Money market accounts generally require higher opening balances than regular savings accounts. This can range from $1000 to $2500. There are often penalties and fees if your account drops below this amount. The share price is kept at a consistent one dollar per share. Interest on the money market mutual fund is usually reinvested in the account and can be withdrawn at the owner's convenience.
Effects
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Since money market mutual funds are so fluid, investors of all sizes use them as a storing place for cash. Dividends and interest from other accounts are often directed to money market mutual funds. Proceeds from security sales or cash waiting for investment in securities also sit in money market mutual funds. The money does not usually sit there long and large fluctuations in money market mutual fund balances are common. They are among the most widely owned types of investments.
Warning
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While the risk of losing money in a money market mutual fund is very low, it is not impossible. Money market mutual funds are not bank accounts so are not insured by the FDIC. The interest paid by money market mutual funds can also drop very low in a short period of time. The interest rate can even fall to zero without investors realizing it. It is important for investors to keep an eye on their money market mutual fund performance to make sure that it is beating the rate of inflation.
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