Money market funds are a great option for risk-averse investors who wish to protect their money from volatile market fluctuations and still earn a bit of interest. Usually, money market funds are used to hold money that is not currently invested, rather than keeping it in a lower-yielding savings account.
There is a specific type of money market fund that is slightly different from what most retail investors are familiar with, known as the institutional money market fund.
What is an Institutional Money Market Fund?
Institutional money market funds are MMFs made available to institutional investors. These are high-capital organizations like pension funds and non-profits that pool large sums of money from individuals together into one investment, rather than making separate investments on their behalf. Institutional shares exist for many other types of market securities like stocks and mutual funds as well.
In short, an institutional money market fund holds the money of many investors instead of just one and usually requires a very high minimum investment amount.
Advantages of Investing in Institutional MMFs
Due to the much larger investment amount involved with institutional class shares, investors in these funds often get preferential treatment and lower fees. These savings are then passed on to the individual fund holder.
Institutional Money Market Fund Drawbacks
- Low Interest: The primary objective of a money market fund is to preserve capital. Since they are very low risk investments, they do not produce a high return. Even the highest money market rate pales in comparison to more aggressive investment options.
- No Insurance: Institutional money market funds are not insured by the FDIC and principal is not protected in the event a fund loses value.
- High Minimum Investment: The typical institutional money market fund minimum investment can easily be around $1 million. Unless you are an institutional investor or client, it’s doubtful you can afford to invest in one.
If you don’t have the ability to invest in institutional class money market funds, you can still enjoy the major advantages of an MMF with investor class shares, such as capital preservation.
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