How to Characterize Money Market Funds
Money market funds are different from other types of mutual funds. When an investor deposits money it is invested in short-term corporate and/or government bonds (typically 90 days maturity or less). Individual money market accounts are structured much like regular savings accounts, only with check-writing privileges and higher interest rates. These characteristics make money market accounts (and therefore funds) enormously popular.
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Instructions
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Characterize money market funds according to financial institution. Banks and credit unions offer money market funds, as do investment houses like Vanguard Funds and Fidelity Investments. Money market funds have proved to be extremely safe investments over the years, but holders of bank/credit union money market accounts have the added assurance of knowing their money is insured by the FDIC or National Credit Union Authority.
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Look at the features of different money market fund accounts. The checks investors write on their accounts allow easy access to their money as long as they keep a minimum balance, which can vary from a few hundred dollars up to $25,000. Banks tend to have lower minimums and allow more checks per month than do investment houses. Money market funds assess a penalty fee for making too many withdrawals or letting an account balance fall below the minimum.
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Rank funds by the interest rates paid. Because the bonds held by money market funds are so short term, the fund portfolios change constantly, resulting in variable interest rates. Funds with high minimum balances and more restrictions on withdrawals usually pay the highest rates. Bank money market funds are generally grouped together and compete aggressively with one another to attract investors. There is a link to a list of comparative bank money market rates maintained by Bankrate.com below as an example.
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Categorize money market funds by the type of securities they invest in. Some money market funds specialize in high-interest corporate securities. Others invest in government issued bonds whose earnings are partially or entirely tax exempt. The latter tend to pay lower interest, but this may be more than offset by tax savings for investors in high tax brackets.
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Evaluate the fees charged by a money market fund. You'll find all fees listed in the prospectus of each money market fund (this is required by the Securities and Exchange Commission). The most important factor is the expense ratio, which is the percentage of the fund's assets spent on operating costs annually. Financial advisers generally look for low expense ratios in money market funds unless better-than-average performance justifies increased costs.
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