Diversifying your investment portfolio is an essential step everyone needs to take to minimize their risk of loss and increase their chance of maintaining both a healthy principal balance and earning a profit. Money market funds are considered a safe (although uninsured) way to diversify your portfolio while still earning a return.
Per the Investment Company Act of 1940, by law a money market fund must invest in low-risk securities. To help get their optimum and legal mix, money market funds diversify their holdings into extremely liquid and low risk securities such as CDs, government securities or other similar types of investments. The entire construction of a money market account is to keep the net asset value or NAV at a constant $1 per share.
According to the U.S. Securities and Exchanges commission website, “the net asset value, or NAV, of an investment company is the company’s total assets minus its total liabilities.” Typically, money market funds have their NAV calculated daily to ensure that the value of $1 per share remains on track. This is an excellent tool to help protect investors as there are many large financial institutions involved in money market funds, and their reputations can be severely damaged if there NAV score declines below the $1 mark. Theoretically, the management team is always on point coaxing the successful maintenance of money market funds.
Despite the laws and systems in place regulating money market funds and their net asset value criteria, there are still risks involved as with any type of investment. Although loss of principal and value is not common, on rare occasions money market funds have fallen victim to this pattern.
Like with any investment instrument the SEC advises that “Before investing in a money market fund, you should carefully read all of the fund’s available information, including its prospectus, or profile if the fund has one, and its most recent shareholder report.”
Are you looking for the latest money market rates and news information? If so, Go Banking Rates has them and you should visit regularly as money market rates change daily.