Money Market Mutual Funds or MMMFs are built to have choices that work well for small investors. They are a type of fund that is short-term, most of them lasting for less than a year. There are different types of mutual funds. MMMFs have short-term investment opportunities. This is perfect if you are looking for a good place to invest for a short period of time. MMMFs usually produce a higher interest rate than your normal savings account or money market account.
MMMFs also have a high amount of liquidity – the ability to convert your asset, (in this case your MMMF), to cash. With other investment options, such as Certificates of Deposits or a money market account, there are rules as to when and how much of your money may be withdrawn. With your MMMF you have the ability to cash out at your convenience.
MMMFs are categorized by what they invest in. There are two types of Money Market Mutual Funds:
- tax-free Money Market Mutual Funds
- taxable Money Market Mutual Funds
Tax-free (same as tax-exempt) money market mutual funds invest in state and local money instruments. Income generated from a tax-free MMMF is exempt from federal taxes, and in some areas, may also be exempt from state and local taxation.
Tax-free MMMFs generally have a smaller return than taxable MMMFs. This does not make them a poor investment because they are advantageous in other ways. The fact that you pay no federal taxes from your MMMF increases the amount you actually keep.
How do you know if you are most suited for a taxable or tax-free MMMF? If you are in a higher tax bracket, the tax-free MMMFs are more suited for your investment needs. Once you have an MMMF, your funds will grow and interest will generate. As you will see, the more you earn on your MMMF, the more you will have to pay in taxes. Being in a higher tax bracket means taking advantage of the tax-free MMMF.