What is a Money Market Fund?

A money market fund is an open end mutual fund that invests in short term debt securities. Money market funds are also known as principal stability funds. This type of investment is in the money market and the key objective is the conservation of principal, accompanied by humble dividends.

Money market funds are often used by financial institutions to store money that is not currently invested and thus, money market funds are highly liquid investments. Most deposits into a money market fund are not FDIC insured, but the risk still remains to be extremely low. Money market funds are among the safest types of mutual funds because by law, they are required to invest in low-risk securities.

Money Market Fund Traits

Money market funds mainly invest in government debt securities. Because the government has the ability to raise taxes in order to pay debt, these funds are considered very safe.

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Money market funds return an average of 4 to 6 percent a year, which rivals the return of CDs. The biggest risk involved in investing in money market funds is the danger that inflation will outpace the fund’s earings, thereby eroding the purchasing influence of the investor’s money.

Most mutual fund companies carry some sort of insurance to cover assets. Investor losses in money market funds are generally rare. However, they are possible. Money market funds generally have good credit quality, can help maintain a diversified portfolio and are generally a smart place to hold money when between investments, saving for a house, saving for a vehicle purchase or simply looking for a safe place to put money.

Types of Money Market Funds

There are various types of money market funds, the most common being a traditional, investor class. Institutional money market funds also exist for institutional investors looking to deposit into a larger pool of funds and gain lower commission fees.

For anyone looking for a low-risk investment in overseas securities, an international money market fund invests in in fixed income securities like government bonds, mortgages, CDs and corporate bonds in other countries.

Before investing in a money market fund, you should read all the funds’ available information, including its prospectus, or profile if the fund has one, and its most recent shareholder report.

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