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Put that cash to work! - Saving money in typical savings accounts and CDs is safe, but inflation and taxes diminish your returns and many savers may actually be losing money. In contrast, money market funds generally produce a higher yield return than deposit accounts and are one of the safest investments. For example, the average taxable money market mutual fund returned 4.42% on June 6, 2006 according to iMoneyNet.com. For cash investments, that's pretty good! High-yield tax-free money market investments are also available.
Money market deposit accounts can be opened at banks and are insured by the FDIC, while money market fund accounts can be opened through banks, brokerages and mutual fund companies and are not insured by the FDIC. Financial experts have soured on the idea of savings accounts as an investment tool because many accounts do not keep up with inflation and income taxes further erode any savings benefit. Simultaneously, money market funds and accounts have grown in capital and popularity because they deliver a healthy low-risk return. Fund investors typically use money market funds to store their cash between investments. These funds also have many of the features of a bank savings account with a higher interest rate. Consequently, many consumer finance experts are recommending their use for a wide range of savings goals including homeownership, college savings, emergency fund development and retirement planning.
More Money for Four Types
of Money Market Funds
Money market funds are an essential part of any portfolio. Even if you are strictly a stock, bond or options investor, you should maintain a cash position in a money market fund to take advantage of extraordinary market opportunities and to protect yourself against market crashes (like 9-11) that crush all markets simultaneously. Money market funds are an ideal cash investment tool because they are highly regulated and fund managers must invest in very safe, short-term debt securities such as U.S. Treasury bills, CDs, and commercial paper. These safe investments typically allow money market fund managers to maintain the fund's price per share at $1. There are five primary types of money market funds including:
- General money market fund
- Municipal money market funds
- Socially responsible money market funds
- US government and agency money market funds
- US Treasury money market funds
Yields go down as fees go up
Money market fund managers invest in a market that is transparent and predictable. The securities performances rarely vary from the contracted terms, and all managers have an opportunity to make investments in any given offering. Thus, fund-to-fund performance differs little except for the expenses charged by the funds. Fund expenses can vary widely, and will have a dramatic impact on the yields realized by investors. Generally, investors should seek out funds with expenses below .5 percent and should be aware that most larger retail funds have expenses at or lower than .25 percent.
Disclaimer - The information on this site is believed to be accurate, but no warranty is made regarding rates, terms or features of any financial product. Carefully read the prospectus for any product before investing. The best money market funds, accounts, and rates are determined by individual needs, and tax, financial and legal advisors should be consulted before making an investment.
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