A money market fund is a type of mutual fund that invests in short-term Treasuries and other money market instruments, including U.S. government securities and commercial paper. Due to the nature of the short-term investments, these are considered highly liquid. That means they can be exchanged for cash easily, giving investors access to their money when they need it. In addition, money market funds have typically offered a better yield than those available from a standard bank savings account. Unlike a savings account, money market funds are not traded throughout the day and you may not be able to access your money intraday. Additionally, money market funds charge fees that can exceed the income earned on fund investments in low-interest rate environments.
The U.S. Securities and Exchange Commission mandates that only short-term securities with high credit quality are available in money market funds. For the most part, money market funds are considered to be safer than other investments, with a target value of $1 per share. Money market funds have only dipped below this value (a term known as “breaking the buck”) on a small number of occasions associated with financial crises.
Here are some key ways that a money market fund can help support your overall financial plan:
1. Funding short- to intermediate-term financial goals. If you’re saving for a financial goal that falls within the next three to five years, a money market fund may make sense. This could include such goals as saving for a vacation or wedding or a down payment for a house. In these cases, it may be more important that your savings hold their value over the shorter period.
2. Maintaining an emergency fund. Having money saved in a money market fund can act as a personal safety net to get through financial hurdles, such as a period of unemployment or an unbudgeted large expense (such as a car or roof repair, or a dishwasher or washing machine/dryer replacement). Many financial professionals recommend an amount that could cover three to six months of expenses. The liquidity feature of money market funds makes them a good option for this.
3. Holding assets temporarily. A money market fund may also be used as a place to temporarily hold or transfer assets, such as an individual retirement account rollover or an inheritance, while trying to decide how to invest those funds for the long term.
Keep Your Long-Term Investment Strategy in Perspective
While money market fund yields have risen as they benefitted from the Federal Reserve raising interest rates, they may not be appropriate for long-term investing—particularly in your 401(k) or other workplace retirement plan—as the returns tend to be lower than stocks and bonds, which are riskier investments. In addition, over time, the returns may not keep pace with inflation.
What’s in a Name?
While they sound similar in name, a money market fund is not the same as a money market account. A money market fund is an investment that is sponsored by an investment fund company. Therefore, it carries no guarantee of principal. A money market account is a type of interest-earning savings account. Money market accounts are offered by financial institutions and are insured by the Federal Deposit Insurance Corporation. Money Market funds are not insured by the FDIC or other governmental agency. Although money market funds seek to preserve the value of the investment at $1 per share, it is possible to lose money and there is no guarantee you will receive $1 per share when you redeem.
Sources: Investopedia.com, “Money Market Funds: What They Are, How They Work, Pros and Cons”; T. Rowe Price,“4 Reasons to Save in a Money Market Fund.”
This material is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Investments are subject to risk, including the loss of principal. Some investments are not suitable for all investors, and there is no guarantee that any investing goal will be met. Past performance is no guarantee of future results. Talk to your financial advisor before making any investing decisions.
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