Discovering the Best Money Market Funds

What is a money market fund?

This is a mutual fund that invests in short term money market instruments at high yields. Instruments can be varied, and include commercial paper, treasury bonds, CD’s and others, depending on the money market.

A money market fund will be invested in instruments that are highly liquid and risk free, mainly because they are government secured. 

Most mature within a year and their goal is to keep the principal amount invested intact while at the same time offering investors a good return. There are different kinds of money market funds. Some are insured and offer lower yield but less risk, while those that are not and are offered by non-bank institutions offer higher interest rates but at the same time come with higher risk. The concept of the best money market funds comes here – you want one with reasonable level of risk, but a reasonable yield as well.

All money market funds aim never to make a loss. They try to keep their net asset value at $1 so that only the yield may shift either up or down. It is rare, but it does happen that the net asset value can fall below $1 if investments do not do well. That is considered a loss. As an investor, you want to know these kinds of facts about the money market fund of your choice. They will guide you towards choosing the best money market fund.

Money market funds are sometimes confused with money market accounts, but the 2 are different. Money market funds are sponsored by fund companies and have no guarantee on the principle. Money market accounts however are like interest earning savings accounts offered by the FDIC insured institutions, mostly banks, and the principal is guaranteed by up to $100,000. Money market accounts pay higher yields than regular savings accounts, but less than a CD and far less than the best money market funds.

So Why Money Market Funds?

They are preferred for a number of reasons.

1. They are a relatively safe vehicle for investment. The securities or instruments in which the funds invest are usually very stable, with quick maturity periods that are accompanied by fixed returns. The low risk comes because the securities are purchased from highly stable institutions, like banks, the government and large companies.

2. They require only a low initial investment. As a general thing, money market securities are expensive. It is the rare individual investor who will be able to afford them. Money market funds are different – they tend to be lower than even mutual fund requirements, making entry into the investment fund quite easy. Their whole structure is so that people can invest low amounts in a relatively secure environment.

3. They are accessible – you can buy and sell shares at any time. There are no market timing restrictions. You can even write checks from these funds, which will be paid on the same day. If you compare this to a mutual fund for example, which take 3 days to pay, you will see why they tend to offer a much better investment option.

Money market funds will come as either taxed or tax-exempt. The tax-exempt ones will have a generally lower yield than those which are taxed, but still be able to earn you more than other investment options.

Even with all these great things about money market funds, you want to find the best money market fund out there. There are some that have been around for many years, and are reputed to be highly reliable and will almost always give you value on your investment.

After the recent global crisis, it’s important to choose investment options that are firmly on the ground and have been for a long time. Your investment portfolio should be comprised of only the most reliable investments, but you should be able to enjoy a higher yield than if you were to leave your money lying in the bank, and at relatively low risk.

Choosing the best money market funds can be complicated. The best way to go about it is to talk to a professional investor who knows where best you would invest. Aim to educate yourself also; there is lots of information out there.