In the search for safety and returns, some investors turn to either a money market mutual fund or a fixed income fund. Money market funds invest in short-term, low-risk securities while fixed income funds invest in bonds. Although these are similar types of investments, one may be better than the other for you, depending on your situation.
Money Market Funds
A money market mutual fund is a type of fund that invests in short-term debt obligations. For example, the money market fund might invest in Treasury bills that are issued by the United States government. They could also invest in commercial paper issued by large, creditworthy corporations. Money market securities have short maturation terms and provide modest interest rates. Mutual funds of this type strive to keep their share price at $1.
Fixed Income Funds
A fixed income fund is a type of mutual fund that invests in bonds. They could invest in corporate bonds or government bonds. Some fixed income funds also invest in municipal bonds that are issued by local governments, schools and other organizations. A fixed income fund collects the interest payments made by the bond issuers and then distributes them to the investors in the fund. It periodically buys and sells bonds depending on the investment criteria of the fund.
One of the differences between these two types of funds is the level of liquidity they provide. When you have money in a money market mutual fund, you can access it very quickly. These types of funds often issue checkbooks or ATM cards to shareholders so they can access the money. By comparison, if you have money in a bond fund, you will have to wait until the end of the trading day to sell your shares and get your money.
If you are after returns on your investment, the bond fund will usually be the superior choice for you. When you put money into a money market mutual fund, it is typically viewed as a safe place to keep your cash before you use it for something else. The return that you earn is merely a bonus. When you put money into a bond fund, you can earn higher returns and you might actually use this as a long-term investment strategy.