If you are like me, that description doesn’t help me understand what it is, or why I would want to have one. Break down the term, Money Market Mutual Fund into two pieces to understand the whole.
Mutual Funds
A mutual fund is managed by a company that pools investors’ money together to make investments in stocks, bonds, money market funds and other types of investments. This group of investments is called a portfolio.
Money Market Accounts
A money market account is a type of savings account that is often offered by banks and credit unions. Just like regular savings accounts, you can put in money and take it out, earning a monthly or quarterly interest on the money in the account. The difference between a regular savings account and a money market account is that money market accounts usually pay higher interest.
Money Market Account will also have higher minimum balance requirements that are usually in the $1000-$2500 range, and you will only be allowed three to six withdrawals from the account per month. These withdrawals are often made by check. Most Money Market Accounts will allow you to write up to three checks per month on the account.
Money Market Mutual Fund
So a Money Market Mutual Fund is basically an investment account that is managed by a professional investment manager. You don’t have an interest rate that is set at a specific percentage like it is with a regular savings account or a money market account at a bank or credit union. The interest rate will fluctuate. The money market mutual fund or money fund can be defined as a collection of short-term debt investments that are held by that mutual fund.
These money market investments are debt securities that will mature within thirteen months or less. A debt security is a bank note, or bond or other type of document that is written to specify a debt. The money earned on the account or the interest rate will fluctuate according to the profits generated on those debt securities. The professional investment manager buys and sells securities for the most effective growth of the fund.
As a mutual fund investor, you become a “shareholder” of the mutual fund company. These are fractional interests in the investments. A single share in a money market fund is always set at one dollar. The share price doesn’t fluctuate, but the interest rate will.
There are specific rules and regulations on these types of funds that are monitored by the SEC or Securities and Exchange Commission, which is a government organization. One of the regulations is that the SEC mandates the average maturity of investments in a money market fund. This mandated time frame is to be less than 90 days. This is done to limit the risk of investing in money market funds.
Types of Money Market Funds
There are several classifications of money market funds. These classifications are based on the type of debt they will purchase. There are Government money funds which will invest in US Government and agency securities. These funds might be Treasury-only funds, or they may include a full range of government securities.
There are also nongovernment funds that buy money market securities that are issued by corporations or businesses. The third type of fund is a tax-free money fund which invests in securities that are issued by municipalities.
Money Market Mutual Funds Are Not FDIC Insured
If you have a money market account at a bank the money is insured by the Federal Deposit Insurance Corporation (FDIC). This means that if the bank or credit union goes out of business, your money will be replaced by this insurance. If the money market account is at a credit union, the money is insured by the National Credit Union Administration (NCUA), which is also a federal agency.
However, Money Market Mutual Funds are not held at a bank or credit union, they are held by a brokerage house. The most important point about this money is that it is not insured from investment losses by the FDIC or NCUA. Money Market Mutual Funds carry risk, just like any other investment in the stock market. You investment in these types of funds can generate gains or losses depending on many factors.
Fees For Money Market Mutual Funds
Money Market Mutual Funds generally have an annual account fee and an annual expense ratio that is passed onto the investors. These fees can deplete a small account. For example, if you invest $2000 in a money market mutual fund and earn three percent, you’ll get sixty dollars in interest on your investment. If the fund has a $25 annual fee and then charges half a percent for the expense ratio or another ten dollars, you’ll end up with only $25 in interest. It is important to understand all the fees associated with an account you are interested in.