How to Compare Money Market Mutual Funds
Money market funds are considered the safest mutual funds because they invest in short-term high quality money market instruments, which allows them to keep the share price constant at $1 for safety of principal and liquidity. They should be evaluated on the basis of current yield and relative safety.
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Current Yield
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Since money market funds invest in the same types of securities, the returns they get are comparable and the difference in yield may be the result of lower fund expenses.
Size
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Money market funds are not insured. Losses are extremely rare, but generally the larger the fund, the less the potential impact of a loss.
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Type
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Money market funds can be general purpose (corporate), government or municipal. General purpose funds are fully taxable, whereas municipal funds can be free of federal or federal and state income tax, so taxable and tax-free funds should be compared on the basis of after-tax returns. Government funds usually have slightly lower yields than general purpose funds but offer the extra layer of safety that comes with holding government securities.
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References
- Photo Credit cash image by Alexey Klementiev from Fotolia.com
