Understand What You Are Buying

A money market mutual fund may look like a savings account. They often come with check books or ATM cards for easy access and you may be purchasing your account from a bank. But this is not a savings account or a CD or a money market account. This is a mutual fund. The product is not insured, you don’t get a guaranteed rate of return, nor is your principle secure.

It is important to understand this because some banks will lump these funds in with other “savings” options on a marketing brochure and not spell out the differences. Make sure if you are looking at “money market” options that you know if you are looking at an interest bearing, insured, money market account…or if you are looking at a money market mutual fund account which may pay a higher rate of return, but also has more risk associated with it.

Don’t Choose the First Money Market Mutual Fund You Find

Do your comparison shopping on mutual funds. Read the prospectus and ask lots of questions for those you are interested in. There are literally close to a thousand different money market mutual funds available.

These funds are all run by different companies and all have different goals and risk thresholds. They all have different fees and histories. Narrow the field down by asking questions and checking out any comments about the fund from different sources. It is important to read the prospectus of the fund and to ask for a Statement of Additional Information from the company.

If you don’t understand specific terms or any abbreviations in the information provided, make sure you get everything explained. If the investment company doesn’t seem willing to explain the information or make you feel comfortable with their answers then they probably aren’t the place you want to invest your money.

Money Market Mutual Fund Fees

With so many different options and different places to invest your money in money market mutual funds, you will find that the fees and the way fees are charged—vary greatly.

Make sure you understand what all the charges and fees are that apply to the mutual fund you choose. This will mean that you need to understand the terminology that goes with those fees. Here is a sample of the fees or charges that might apply to your money market mutual fund:

1. Front-end loads – This is usually a percentage fee that is charged at the “front-end” or when you purchase the fund.
2. Back-end loads – This percentage fee is charged at the “back-end” or when you sell or cash out your money market mutual fund.
3. No-load funds – These are mutual funds that don’t charge the Front or Back –end load fees when you buy or sell a mutual fund. But they often charge a set management fee so make sure ALL the fees are spelled out in advance.
4. Breakpoint Selling – There are many mutual funds who will reduce the load percentages or the sales charge after you invest a specific dollar amount. For instance you pay the fees if you invest $3000, but don’t pay the fees if you invest $5,000. $5000 is the breakpoint. This is just an example. Make sure you understand what the breakpoint is for any money market mutual funds that you are considering. This information is generally listed in the fund’s prospectus under Sales Charge.

Money Market Mutual Fund Summary

There are other types of mutual funds. Some mutual funds invest in stocks or bonds, not money markets. If you compare money market mutual funds to these other types of mutual funds you will find that the money market funds are comparatively low risk.

Ordered by federal regulation to only invest in high quality, short-term investments, the money market fund is less likely to crash with the stock market. You earn your money because the money market fund earns a fluctuating interest rate on the money deposited. This money is based on how well the fund is run and the types of securities they’ve purchased.

One of the most important benefits to a Money Market Mutual Fund is that it is diversified. This means that they are made up of many different investments. Having different investments can lower your risk factor because you avoid having all your money tied up in one place.

With money market mutual funds there are lots of options to choose from. There are tax or tax-free, fee or no fee, minimum or no minimum funds. With so many choices it is important to ask all the questions and understand the differences between the funds before choosing the one that’s right for you.

Tip One

The first tip is to check the history. While past performance doesn’t mean any guarantee of what the fund will do in the future, it can provide a baseline for questions. How long has the fund been operating? What have the fees or loads been? What has been the historic return on investment? Compare fund histories for the accounts you are interested in.

Tip Two

Request a copy of the fund’s prospectus and read it. The prospectus will give you more information on the strategies used to invest. It will give you an idea of the performance objectives, risks and expenses associated with the money market mutual fund. Compare the funds objectives and see if it meets your own risk tolerance and goals.

Tip Three

Check the fees. Compare any sales charges or transaction fees. Some have load or fees that are charged when you deposit money, some when you take it out and some don’t have any fees. Some fees aren’t reflected in the performance ratio so make sure and check all the fees and factor this into the final return on investment. This includes fee waivers. Some companies will waive fees for the first year or a specified period of time. Make sure you understand all the charges.

Tip Four

Are the funds registered for your state? Not all funds are available in all states. Make sure when you are looking into the funds that one you are interested is actually available to you.
Tip Five
Are you looking for tax-exempt funds? Money market mutual funds can invest in municipal and state bonds and offer tax-exempt returns on investment. Understand if the funds that you are looking into are tax-exempt or not.

Tip Six

Do you want easy access to your money? If you do, many money market mutual fund accounts will offer an ATM card or checks on the account. Some will allow for instant online shifting of withdrawals to your checking account. Don’t forget to compare withdrawal options when you are looking into the different accounts.

Tip Seven

Understand that investing in a money market mutual fund is not a savings account. These types of funds are not guaranteed by the FDIC or anyone. There are risks to assess and it is just like any investment, you might lose your money instead of making a return on the investment.

Summary

A Money Market Mutual Fund is basically an investment account that is managed by a professional investment manager. These accounts don’t have a specific interest rate for return on investment like is done with a regular savings account or a money market account at a bank or credit union.

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.

In 2008 there were more than 800 different money market funds in the United States. These 800 different funds accounted for about 10 percent of all US mutual funds. The Securities and Exchange Commission has specific guidelines on the type of investments that can be included in a money market mutual fund. These guidelines monitor things like company credit quality, liquidity and diversification.

There are federal securities laws that monitor many different aspects of a money market mutual fund. The FCC even provides limits on what kind of investments a money market fund can make. There are still risks and investors have lost money on these funds, but the risks are generally a lot lower than playing in the stock market.

What type of investors use Money Market Mutual Fund Accounts?

One of the main benefits to utilizing a money market mutual fund is liquidity. This means the money you have in the account can be assessed easily. You can take it out without penalty and add more to many of the accounts without paying commissions or fees. Many investors will use the money market mutual fund accounts as a holding account for other investments they’ve sold and plan to invest somewhere else.

Often these money market mutual fund accounts are used for those investors who want to preserve their money, yet still get a better return on investment than a savings account or CD. Yet often the money market mutual fund account offers either an ATM card or checks for easy withdrawal.

Is the money in a Money Market Mutual Fund insured?

The answer to this is no. Money market mutual funds are not insured like a bank savings account or bank money market deposit account. Neither the Federal Deposit Insurance Corporation nor the National Credit Union Administration insures the money deposited in a money market mutual fund account.

Why should I consider a money market mutual fund versus putting my money in a savings account?

For one thing…the amount of return on the money you put in a money market mutual fund is often double or more what savings account interest would be. Many savings accounts today have a 1-3% interest, while money market mutual funds often annualize at 15% or higher. Depending on your tax bracket, there are tax-exempt funds that put their investment dollars into municipal and state government bonds and securities.

A money market mutual fund generally will allow you to take money out at anytime via a check or ATM card. You are not penalized for withdrawing money as you might be if you took money out of a CD account early.

Is there a minimum amount that I must deposit to open a money market mutual fund?

The answer to this is it varies. Some accounts require a minimum deposit and some require a minimum balance. But this is account specific. It could be as little as nothing, $500, or more than $2500. Make sure that you understand the account requirements and use these guidelines to compare services.

Money market mutual funds can generally be bought and sold at anytime. You are not required to hold on to them for any specific period of time like a certificate of deposit.

What else should I look out for if I want to buy into a money market fund?

This isn’t a savings account, it is an investment. There are some risks and fees that are associated with this type of an account that you may not be aware of. Make sure you check out the Investment Company or money market mutual fund account and find out how long it has been operating, who manages the fund, and what fees and regulations are applicable.

As discussed above, find out if there is a minimum deposit or balance. Then find out if you are restricted to a specific number of withdrawals per month. Ask about the fees associated with the account and if you have to pay them based on the money you put in or the money you take out?

Do your research, ask questions and read the fine print. The flexibility, return on investment and overall stability of money market mutual funds may be worth the time it takes to research the options.

These money market mutual fund investments are usually made in things like government securities or T-bills, CD’s or certificates of deposit, and commercial paper. An example of commercial paper can be a very short-term promissory note.

Benefits to Money Market Mutual Funds

One of the most important benefits to a Money Market Mutual Fund is that it is diversified. This means that they are made up of many different investments. Having different investments can lower your risk factor because you avoid having all your money tied up in one place.

Another benefit is that money market mutual funds are managed by a professional. This means that you don’t have to keep track of everything yourself and you can just buy into the funds and just forget about it. The fund manager is paid based on how well the money market mutual fund performs and the managing of the fund is their full time job.

Open-ended Versus Closed-ended

If you are considering investing in money market mutual funds, one of the first decisions you will need to make is if you want an open-ended or closed-ended fund. An open-ended fund means that shares can be bought or sold from the fund at any time.

A closed-ended fund means that there are only a specific number of shares that can be issued within it and these shares can only be sold back to the fund when the fund closes or is terminated. There is a secondary market that allows you to sell closed-ended funs to other investors.

Understanding What Load Means In Reference To Money Market Mutual Funds

When you purchase a money market mutual fund you can be charged a service or sales fees to buy the fund. These fees are called load charges and are looked at as a commission or research fees. The load is paid out to the fund salesperson.

Load fees and charges vary, but they can add up to as much as 8.5 percent of the selling price of the shares you buy in the fund. These fees can be charged in several different ways. A front-end load means that you pay the charges at the time you purchase the mutual fund. A back-end load means you pay the charges at the time that you sell your shares.

There are also no-load money market mutual funds. As expected, a no-load fund means that there are not charges made for sales fees. This type of money market mutual fund is marketed directly, without a sales person. You can buy them simply by doing a little research yourself.

The last type of money market mutual fund account is a low-load fund. This means that the fund can only charge up to a 3.5 percent sales fee versus the 8.5 percent of the others. It is important to understand the associated fees when you choose your money market mutual fund and take these costs into consideration when you are comparing the different funds.

Additional Benefits

Often money market mutual funds have free checks or come with an ATM card. This allows you to easily access your money. Your investment is liquid, yet the rate of return is usually higher than in a savings account. There aren’t early withdrawal penalties like you might get with a CD.

Because money market mutual funds have to invest 95% of their assets in what is called first-tier securities, they are considered to be very safe investments. A first-tier security is something like a government T-Bill or private paper issued by a top-rated institution.

Another advantage to a money market mutual fund is that investors are allowed to link up their money market fund accounts with any stock or bond fund accounts. This means that any interest or dividends that are earned on the stock or bond accounts can be deposited immediately into the money market fund account. This means that earnings can be generated immediately on this new money.

The money market mutual fund account is often used by investors to “park” funds generated from the sale of stocks or bonds. They utilize the money market fund as a holding area once a stock or bond is sold until they figure out what else to buy.

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.

The money market mutual funds are designed to work well for those who are small investors. This often means those who will make an initial investment of just $500 up to about $5000.  The qualifications for buying these investments are fairly simple.  Most investors will buy them through their investment brokerage.

In most situations, you can purchase the money market mutual fund directly from your brokerage as you would buy stock or any other type of equity mutual.  You can also talk to your local bank. Many banks that offer mutual funds will also offer money market mutual funds to their patrons.  Some will have their own proprietary funds that give you the money market investment opportunity. Be sure to be comparing the right options, though. Many confuse money market accounts with money market mutual funds;the two are completely different. A money market account is an interest baring account, which is not the same as a money market mutual fund’s structure.

As an investor, you may want to consider these mutual funds for other reasons, as well. Perhaps the most substantial other difference between these accounts and others is the withdrawal method. These types of withdraws are very similar to the procedures used for withdrawing funds from a bank or from a trust.  You may be able to structure the money market mutual fund accounts to allow you to write checks directly from the accounts. You may have to meet specific minimums to do so (usually no less than $500 per withdrawal.) You may be able to use electronic funds transfers and wire transfers as well from the fund to your bank account.

Caution When Using Them

Although these are very good reason to invest in money market mutual funds, you still must consider them as an investment rather than a bank savings account.  The risks of losing your money here are low, but there are still some risks in place.  You should also work with your broker to determine the best type of investment for the type of funds your need. You may be able to benefit from another type of investment, depending on your particular needs.Prior to investing in any type of investment, including money market mutual funds, talk to your broker about your options.  Plan an investment that works for all of your financial goals, especially those goals having to do with liquidity and earned returns. Many investment opportunities can be highly lucrative in this sector.

Those who are interested in investing their money may want to consider the benefits of using money market mutual funds. While these are a type of investment that investors can get into more easily than others, they are still quite complex types of investments and do require a good level of understanding of the various types of investments pertaining to these mutual funds.

This often includes commercial paper, certificates of deposits, bankers acceptances, and Treasury bills. Most of the money market mutual funds available today are made up of these types of funds. The key is to understand what they are and what they can do for you.

What Is It And How Does It Work?

Money market mutual funds are designed to make the investor’s job easier (though this is not a tool for a novice investor to invest in.) One of the particularly good features about these types of funds is that they are uniquely liquid, especially in comparison to other types of funds on the market. There are several situations in which these funds make a fantastic opportunity to use them. While you should have the advice of your stockbroker, you may see them using these funds for a number of reasons, including these.

Park It!

One reason that money market mutual funds are used is to park funds, including cash reserves, when you are not yet ready to put the money into another investment.  In addition to this, they work very well as a place to position money when you know you will need a cash outlay for anon investment purpose in the short term. The benefit here is that the accounts are liquid: you can convert them into cash in hand rather quickly in comparison to other types of investments.  Additionally, they are very safe, which helps you to keep those funds safe, but still earning money for you, while you determine the best next step.  You can have the amount of money you need at the very instant that you need it.

Another reason why people use money market mutual funds is to move money from one fund to the next.  For example, perhaps you have a good assortment of mutual funds from one single fund company. You may want to move some of your investment into another fund. While this is fine, if you want to sell a fund before you choose where you will put the proceeds, these mutual funds can serve as  a good place to put the money until you make a decision about where to place the investment money. When the time comes, and you have made the decision of where the funds will go, you can simply exchange your money market mutual fund for the shares of the new investment that you are planning to invest in, within the fund family.

You may also find that this is one of the most common ways that brokers manage their funds. They often need to have cash reserves on hand for when their clients need to liquidate funds quickly. This is particularly something that is required in firms where the sums may be smaller. To benefit the client, the company will use a money market mutual fund to provide access to the cash when needed. In addition, by putting these dormant cash into the funds, they will help the client to earn an extra percentage point, or more so, in annual returns. These extras are earned above those earned by other possible investments.