Characteristics of Money Market

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Money market mutual funds are an investment account that financial institutions offer to investors. These funds have some liquidity because most money market mutual funds allow you to write up to three checks per month. If you need instant access to your money, a checking account would be better. However, if you want a higher rate of return than a savings account with limited access to your money, a money market mutual fund may be a good investment for you.

  1. Rate of Return

    • The rate of return on money market mutual funds is usually higher than other accounts offered by banks such as savings accounts, but varies based on the performance of the investments. The rate usually ranges between 1 percent and 6 percent according to Investopedia. However, unlike other bank accounts, a money market mutual fund does have the potential to lose money should the investments perform poorly.

    Investments

    • Strict regulations are in place regarding what instruments money market mutual funds can invest in, which include short-term debts such as bonds that cannot have a term of more than 13 months. The average maturity date for all securities the fund invests in must be 90 days or less. These are conservative investments that are in place to limit the potential for these funds to lose value.

    Taxes

    • The dividends paid on money market mutual funds are taxable in the year that you earn them. If you earn more than $1,500 in dividends in a tax year, you must file a Schedule B as part of your tax return. Some money market mutual funds are designed to invest only in tax-free investments such as municipal bonds, so the returns are all tax free.

    Fees

    • The financial institution that manages the money market mutual fund will charge a fee for managing the investments. These fees are usually less than 0.5 percent of the account. Like other accounts such as savings accounts and money market deposit accounts, there are usually minimum account balances you must maintain to avoid paying additional fees.

    Security

    • In exchange for the benefits offered by money market mutual funds, you lose some of the security that traditional bank accounts offer. Because the money is invested in securities, it is not protected by FDIC insurance. If the bank fails, you will lose your investment.

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