If you are interested in the money market, the easiest way to access it is through money market mutual funds. These funds require you to have an understanding of the Treasury bills, commercial paper, certificates of deposit, and others, which make up a bulk of money market mutual funds.
See also: Treasury Bonds and Their Advantages for Investors
Money Market Mutual Funds vs. Money Market Account
Not like cash and even typical certificates of deposit
(CDs), money market mutual funds are not insured by the Federal Deposit Insurance
Corporation (FDIC).
Even though rather small, there is always a risk that the
investor could lose money. Put another way, the crucial difference between
money market funds and money market accounts is that the formers are backed by
fund companies and carry no guarantee of principal, while the latter are
interest-earning savings accounts which offer limited transaction privileges,
and which are offered by financial institutions insured up to a certain limit.
Money market accounts typically pay a higher interest rate
than a passbook savings account, but generally a slightly lower interest rate
than a CD or the total return of a money market fund.
Money Market Mutual Funds Advantage 1
Money market mutual funds provide a convenient storage for
cash reserves when an investor is not quite ready to make an investment or is
anticipating a near-term cash outlay for a non-investment purpose.
Money market mutual funds offer ultimate safety and liquidity.
This means that investors will have an easy sum of cash at the very moment that
they need it.
Money Market Mutual Funds Advantage 2
An investor who is holding a basket of mutual funds from a
single fund company may occasionally want to move to transfer assets from one
fund to another. On the other hand, if the investor wants to sell a fund before
deciding on another fund to purchase, a money market mutual fund offered by the
same fund company may be a good place to park the sale proceeds.
Then, at the appropriate time, the investor may exchange his
or her money market mutual fund holdings for shares of the other funds in the
fund group.
Money Market Mutual Funds Advantage 3
To offer advantages, brokerage firms regularly use money
market mutual funds to provide cash management services. Putting a client’s dormant
cash into money market funds will earn the client an additional percentage
point in annual returns above those earned by other possible investments.
Categories of Money Market Mutual Funds
Money market mutual funds may have a specific type of money
market security or a combination of securities across a wide spectrum.
·
One particular type of fund limits its asset
purchases to US Treasury securities.
·
Another type of money market funds buys both US
government securities and investments in various government-sponsored
enterprises.
·
The third and biggest class of money market mutual
funds invests in a plethora of money market securities that offer the highest
level of security.
Another important categorization for money market mutual
funds relates to their taxable or tax-exempt status. Taxable funds invest in
securities such as Treasury bills and commercial paper, the interest income on
which is subject to federal taxation.
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