It is important to understand that money market mutual fund accounts all have different amounts and types of investments, but these investments are all made in highly liquid securities that are very short-term. The securities are considered safe havens. A safe haven is defined as an investment that is usually safe from a stock market crash.

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.

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.

Who Are These Investments For?

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.