Money Market Funds (MMF) Basics

Although they are not backed by any type of government financial insurance plan, since 1940 there have been a huge list of checks and balances in place to ensure the regulation of money market funds.

The Investment Company Act of 1940 was passed by Congress as a way to build consumer confidence after the Great Depression. Prior to the act, mutual funds folded and stocks and proved volatile. As stated in the bill, the act was passed to “to mitigate and… eliminate the conditions… which adversely affect the national public interest and the interest of investors,”  and thus provided the rules needed to launch money market funds.

Some money market fund basics new investors should be aware of:

  • Traditionally, there has been no Government insurance in place in case money is lost on these investments, however according to the SEC, “On September 19, 2008, the U.S. Treasury Department announced the establishment of a temporary guarantee program for the U.S. money market mutual fund industry”
  • Although financial losses due to money market investments are rare, they do occur
  • Most experts consider money market funds to be a safe option for diversifying your portfolio
  • By law, money market funds are required to invest in low-risk assets
  • Money market funds are highly liquid
  • According to the U.S. Securities and Exchange Commission, money market funds tend to be comprised of “government securities, certificates of deposit, commercial paper of companies, or other highly liquid and low-risk securities”
  • One strategy that helps make money markets safe is their goal of keeping the net asset value at $1 per share
  • According to the SEC  “An investor tendering mutual fund shares, including shares of money market funds, for redemption generally must be paid within seven days of tender”

It is important to remember that the past performance of a money market fund is in no way relative to the future potential of the investment. Take the time to read the money market funds prospectus before investing to familiarize yourself with all the conditions particular to the fund you are selecting.

Saving and investing is a crucial part to help ensure that Americans will be able to achieve their future financial goals. Whether the milestones are short-term, like sending your children to college, or long-term, like your future retirement, money market funds are a relatively safe way to diversify your investment portfolio and can be used to promote your savings for a specific goal.

If you’re looking to start investing in a money market fund, let Go Banking Rates find you the best money market account rates available so you can start investing in y our financial future.

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