Money market funds are mutual funds designed to be short-term, low-risk, liquid investments. They are usually offered by companies that have invested in other money market instruments and are almost always made up of highly rated papers. Investors can choose from municipal money funds, state-level debt funds, Treasury funds, or funds that focus on exposure to the private commercial money market.
- Money market funds are mutual funds designed to be short-term, low-risk, liquid investments.
- A market can be described as a money market if it is made up of short-term, highly liquid assets.
- Money market funds typically invest in government securities, certificates of deposit, corporate commercial paper, and other highly liquid and low-risk securities.
What does a money market do?
A market can be described as a money market if it is made up of short-term, highly liquid assets. Maturities should not exceed one year on the instruments and can be as short as one day. This includes assets such as certificates of deposit (CDs), interbank loans, money market funds, Treasury bills, repurchase agreements, commercial paper, and short-term securities loans.
The Federal Reserve Board tracks money markets through its cash flow survey. It is standard that money markets account for almost a third of all credit in the United States.
Money market funds
Money market funds were developed in the 1970s to provide the opportunity to purchase a “pool” of securities that generally offer higher returns than interest-bearing bank accounts, while taking substantially less risk than an investment in stocks. typical. The product quickly became popular; Currently, about $ 5 trillion in assets is invested in these money market funds.
Money market funds typically invest in government securities, certificates of deposit, corporate commercial paper, and other highly liquid and low-risk securities. The funds try to keep their net asset value (NAV) at a constant $ 1 per share, so typically only their returns fluctuate. Investor losses in these vehicles are quite rare, but not impossible. The NAV per share of a money market can drop below $ 1 if your investments perform unusually poorly.
A money market is made up of short-term, highly liquid assets.
Unlike a money market deposit account at a bank, money market funds are not federally insured, but are regulated by the SEC under the Investment Company Act of 1940. These regulations prohibit money market funds from acquiring any investment other than short-term, which means that the money market fund can receive its full principal and interest within 397 days. Money market investments must also have minimal credit risk and be highly rated or comparable in quality to highly rated securities.
There are several basic types of money market funds, and each includes different types of investments.
US Treasury Funds
As the name suggests, US Treasury funds invest in Treasury funds. They offer lower returns than other types of money market funds, but they also provide the lowest risk.
In addition, they are exempt from taxes. Treasury funds are suitable for investors with a low risk tolerance who want to earn one to two percent more in return than they earn on an interest-bearing bank account.
US government and agency funds.
US government and agency funds invest in bonds and notes of federal government agencies, which are guaranteed by the US Treasury and Congress. Some also invest in foreign markets, emerging markets and mortgage-related securities. These funds are a bit riskier than US Treasury funds, but offer slightly higher returns. Like US Treasury funds, they are exempt from tax.
Diversified taxable funds
Funds that do not focus on government paper tend to have higher expense ratios, but are known to return more interest income. Diversified taxable funds invest in commercial paper from US and foreign companies, such as repurchase agreements. Some also invest assets in deposits issued by foreign banks. Diversified taxable funds are riskier than many other money market funds, but they also have higher returns. As the name suggests, your income is taxable.
Tax free funds
Tax-free funds invest in short-term, tax-exempt state and local government securities. Naturally, these funds are exempt from federal taxes. They can be quite complicated. Some of them do not invest outside of a single state. They are also the riskiest type of mutual fund.
Tax-free funds are better suited to investors at a higher tax bracket or those who live in high-tax states. For example, T. Rowe Price offers a New York Tax-Free Money Fund (NYTXX), which attempts to build a liquid portfolio of short-term assets that is exempt from federal, state, and New York City income taxes. It is just one of several New York tax-preferred money funds. Similar funds are found for California, Maryland, and other high-tax states.
The bottom line
While money market funds are safe, their long-term returns are lower than bonds and substantially lower than stocks. As such, money market funds are typically used as a place to store cash, either by investors and institutions when they await investment opportunities, or by older investors who value excessive security growth. They can also be used as an alternative to traditional savings accounts for investors in low interest rate environments or they can be included in asset allocation to provide portfolio balance.