Investment options are plentiful for those interested in making the money they earn work for them. With so many choices available, it may be confusing trying to distinguish one from the other. One alternative to consider as a way to diversify your investment portfolio is a money market mutual fund.
A money market mutual fund is a low-risk, low return investment composed of pooled financial resources and managed by an investment fund. The law mitigates the risk factor on a money market mutual fund thus making it the goal of the fund manager to earn interest on the investment while keeping a $1 per share net value asset (NAV). Lower-risk money market mutual funds typically pay dividend in direct correlation of the short term interest rates.
To follow the law and make sure a money market mutual fund is a low-risk investment, the investment is usually diversified between certificates of deposits, commercial paper of companies and government securities. Because the NAV is $1, only the yield fluctuates while the principal value remains intact. Although there are rare occurrences of investors losing money in the money market mutual fund investment, it is not common at all.
Historically money market mutual funds have not been backed by any type of government insurance to protect the investors. However, on September 19, 2008, due to shaky market conditions and nervous investors, the U.S. Department of Treasury have order a level of temporary protection. According the the U.S. Securities and Exchange Commission website “As part of the program, all money market funds that are regulated under Rule 2a-7 of the Investment Company Act of 1940 and are publicly offered and registered with the Securities and Exchange Commission will be eligible to participate.”
If you are an investor who is taking the wise approach to diversifying their financial portfolio a money market mutual fund is a relatively safe approach. However, it will be up to you to properly conduct research on a money market mutual fund or any other type of investment you elect.