They may not be glamorous or bring extreme returns. But then, they aren’t meant to. Recently, money market mutual funds have found their way into a broad variety of investor’s portfolios as their returns have increased and their attractive reliability has continued.
Between June 2004 and September 2005, money market yields increased from over a half a percent, to 2.89 percent, according to an Associated Press story in early-September 2005.1 A rather large jump to say the least.
Serving as a temporary investment vehicle for those not ready to invest, money market mutual funds are generally a short-term saving money tool that, in comparison to many investments, is considered safer and more reliable.
Using the advantages of a mutual fund, a money market version typically invests in a variety of things including CDs, U.S. Treasury securities and debt-obligations. By investing in a money market mutual fund, you’re also benefiting from a possibility of higher returns than those available from individual investment in a CD or money market account.
An investment in a money market mutual fund is not insured or guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other government agency. Although money market mutual funds seek to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in these funds.
Tax savings are another potential plus. You may be able to take advantage of a tax-free money market mutual fund. These are usually funds that purchase short-term debt from tax-free organizations, like state or local government. While their yield is usually lower, you have the potential of saving the difference in taxes.
Many money market mutual funds also offer an advantage if you’re invested in several other types of mutual funds within the same fund company. A money market mutual fund can act as temporary storage if you sell off assets in a mutual fund and wish to keep them in the fund company before investing in another fund. In comparison to other options, this is a relatively easy way to transfer money between funds and still potentially benefit while you choose your next mutual fund investment.
Money market mutual funds can serve a variety of investors but can be most attractive to smaller investors. Many have easier withdrawal features including check writing or wire transfer if you choose to close or move money from an account. Always consult with a financial professional before deciding what investment moves to make. They may be able to guide you to a better option.
Investing in a money market mutual fund is meant for an investor with a specific set of circumstances and objectives. They certainly aren’t glamorous, and they won’t help you retire in style any time soon. But they may be able to offer you tax savings, which is always attractive.