Money market mutual funds are constructed to have options that work well for small investors. They are a type of fund that is short-term, usually lasting for less than a year. There are many types of mutual funds. MMMFs allow for short-term investment opportunities. This is perfect if you are looking for a safe place to invest for a short period of time. MMMFs usually produce a higher interest rate– higher than your normal savings account or money market account.
In addition to a higher interest rate, an advantage of the MMMF is that they have a high amount of liquidity. This means 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of Deposits or a money market account, there are contingencies as to when and how much of your money may be withdrawn. With your MMMF you have the ability to cash out at your discretion.
MMMFs are classified by what they invest in. There are two types of Money Market Mutual Funds: tax-free and taxable. Taxable MMMFs invest in any combination of government, agency, and corporate money market instruments. In this scenario, any money you make off the interest is subject to state, federal, and local taxation. Taxable MMMFs are typically advantageous for most investors because the pay a higher yield than MMMFs that invest in Treasury short-term debt like tax-free MMMFs. Taxable MMMFs have a bigger return, however, you will pay taxes on any money you make.
Taxable MMMFs are especially great for those in the lower tax brackets because as MMMFs generate a higher return than tax-free MMMFs, it’s likely, you will be taxed less on the earnings of your MMMF than if you were in the high tax bracket. Those in the high tax bracket will see benefits in tax-free MMMFs. If you are a small investor and are looking for a good place to generate interest, consider a taxable MMMF.