Money Market Funds for a Down Market

Every investor worthy of the title knows that it is essential to keep funds liquid in a traditional savings account. However, keeping excess sums of money in savings accounts for the long term is not a wise investment strategy as commonly the interest rates earned do not keep pace with the average rate of inflation.

Money market funds are generally believed to be a safe (albeit uninsured) alternative to standard savings accounts, as they are considered to be a liquid investment interest with a slightly higher rate of return then a savings account.

Money market funds are a good place to invest money when the economy is taking a downward stumble as historically, there has been very little negative impact on money market funds.

Reasons for Money Market Safety

There are several core reasons for the stability and safety associated with money market funds:

  • Because of the short-term turnaround of the debt maturity, portfolio managers can make quick adjustments to reduce the risk of the investments
  • The type of investments made with money markets have to be of the highest rated debt, usually with a triple “A” ratings
  • The diversification of a money market fund limits the portion that can be invested with one issuer to a maximum of 5%
  • Large professional financial institutions are in the position of keeping the NAV above $1 in order to keep their reputations in tact

Although money market funds do not have the protection of the Federal Government insurance backing them, they are typically considered to be safe investments and many times even portfolio managers use them to store the surplus cash of their clients before investing.

About the Author

These articles are written by the in-house GOBankingRates team.