A mutual fund is a professionally managed investment that allows you to diversify your savings and potentially realize greater gains than you might otherwise. Mutual funds invest in stocks, bonds and short-term securities. Those that invest in short-term securities exclusively are called money market funds.
How They Work
As a kind of mutual fund, a money market fund must follow specific rules regarding what it can invest in. A fund may purchase government securities, certificates of deposit and short-term investments issued by corporations. When you purchase a share in a money market fund, you’re actually purchasing a share of these pooled investments.
How They Are Valued
Money market funds try to keep the value of each share at $1. This is called net asset value, and it is rare for the NAV to fall below $1. Generally speaking, when you invest $1,000 in a typical money-market fund, you receive 1,000 shares, and you receive interest payments on those shares.
Compared to mutual funds that invest in stocks or bonds, money market funds are considered the least risky, due to the high-quality, short-term investments they contain. However, less risk means more modest long-term gains, and the returns of these funds may not be ideal for investors hoping to outpace inflation.