What Is A Money Market Fund? (2024)

FAQs

What Is A Money Market Fund? ›

A money market fund is a type of mutual fund that has relatively low risks compared to other mutual funds and most other investments and historically has had lower returns. Money market funds invest in high quality, short-term debt securities and pay dividends that generally reflect short-term interest rates.

A money market fund is a type of mutual fund that has relatively low risks compared to other mutual funds and most other investments and historically has had lower returns. Money market funds invest in high quality, short-term debt securities and pay dividends that generally reflect short-term interest rates.

Types of money market funds

Investments can include short-term U.S. Treasury securities, federal agency notes, Eurodollar deposits, repurchase agreements, certificates of deposit, corporate commercial paper, and obligations of states, cities, or other types of municipal agencies—depending on the focus of the fund.

Is a money market fund a good investment? While money market fund yields are rising as they benefit from the Federal Reserve raising interest rates, money market fund investments aren't ideal for long-term investing, as the returns tend to be much lower than stocks and bonds.

Money market funds invest in highly liquid securities like cash, cash equivalents, and high-rated debt-based securities. Because they only invest in highly rated securities, money market funds offer a high degree of safety. Money market funds also offer investors higher yields than traditional savings accounts.

Six to 12 months of living expenses are typically recommended for the amount of money that should be kept in cash in these types of accounts for unforeseen emergencies and life events.

Be aware, though, that any interest earned on a traditional or high-yield savings account—as well as certificates of deposit and money market accounts—is considered taxable income by the IRS.

Because they invest in fixed income securities, money market funds and ultra-short duration funds are subject to three main risks: interest rate risk, liquidity risk and credit risk.

If you don't have a lot of money to start with, a savings account makes sense because it's possible to find accounts that don't require minimums. If you want to earn a higher APY and you can meet a higher account minimum, a money market account is a good choice.

What is better than a money market fund? ›

Short-term bonds typically yield higher interest rates than money market funds, so the potential to earn more income over time is greater. Overall, short-term bonds appear to be a better investment than money market funds. Treasury Bonds vs. Treasury Notes vs.

Prime money market funds.

U.S. government money market funds are typically regarded as the safest of the three, and within that category, those with a high concentration of Treasuries—with full government backing—would be exposed to a lower likelihood of default risk.

Usually, money market funds are recommended to investors with an investment horizon of 90-365 days. These schemes can help you diversify your portfolio and help invest surplus cash while maintaining liquidity. Ensure that you invest according to your investment plan.

While money market accounts typically offer higher interest rates than traditional savings accounts, those may not be high enough to keep up with inflation. This means that the purchasing power of your money will decline over time, even if the account balance remains the same.

Money market accounts are savings accounts that often offer higher interest rates than regular savings accounts and often incorporate checking account features, like easy access to cash. Yet they can also have downsides: Many have minimum balance requirements and excessive fees.

The Bottom Line. Money market accounts are suitable for people who can meet minimum balance requirements that might be higher than a traditional savings account requires, in return for a higher interest rate on their savings when compared with traditional savings accounts.

Average money market rates fall between 0.01% APY and 3.45% APY, again depending on your balance. Below, we've listed a number of popular banks and given a range of their basic money market account rates. Again, your rate will depend on your account balance.

They attempt to keep their net asset value (NAV) at a constant $1.00 per share—only the yield goes up and down. But a money market's per share NAV may fall below $1.00 if the investments perform poorly. While investor losses in money market funds have been rare, they are possible.

Stability & safety

While not insured by the FDIC, the funds are required by federal regulations to invest in short-maturity, low-risk investments, making them less prone to market fluctuations than many other types of investments.

Both money market funds and CDs are relatively safe investments, delivering an income stream in the form of interest or dividends. Money market funds are generally more liquid than bank or brokered CDs.

What is a typical money market fund return? ›

Over time, common stocks have returned about 8% to 10% on average, including recessionary periods. By investing in a money market mutual fund, which may often yield just 2% or 3%, the investor may be missing out on an opportunity for a better rate of return.

A cash deposit of more than $10,000 into your bank account requires special handling. The IRS requires banks and businesses to file Form 8300, the Currency Transaction Report, if they receive cash payments over $10,000. Depositing more than $10,000 will not result in immediate questioning from authorities, however.

Usually you can make unlimited withdrawals and payments by using an ATM or by making the withdrawal in person, by mail, or by telephone. A money market account might require a minimum amount to be deposited. A money market account is different from a money market mutual fund account.

If you plan to deposit a large amount of cash, it may need to be reported to the government. Banks must report cash deposits totaling more than $10,000. Business owners are also responsible for reporting large cash payments of more than $10,000 to the IRS.

Which is safer: a savings account or money market account? Money market accounts and savings accounts are equally safe places for consumers to keep their savings. However, it's important to open accounts at banks that are covered by FDIC insurance. You can check if your bank is FDIC-insured here.

Distributions: Schwab Money Funds pay dividends on the 15th of each month (or on the next business day, if the 15th is not a business day), except that in December dividends are paid on the last business day of the month.

The national average rate for savings accounts will be 0.29 percent by the end of 2023, McBride forecasts, while predicting an average of 0.34 percent for money market accounts.

Easy access: Money market accounts can offer you immediate access to your funds, almost whenever you may need it. MMAs often offer the ability to write checks or access cash via debit card. And know you can typically withdraw without paying a fee as you might with a certificate of deposit (CD).

Does Dave Ramsey recommend money market accounts? ›

Ramsey recommends putting your money not into a savings account, but instead into a money market account. "Most money market accounts will give you a debit card and checks to use -- that way, you can get to your money when you really need to (keeping it 'liquid')," the Ramsey Solutions blog states.

Money market accounts offer greater liquidity than CDs, as you can usually access your funds at any time without penalty. CDs, on the other hand, have a fixed term (ranging from a few months to several years), and you generally can't access your money until the term is up without incurring an early withdrawal penalty.

Equity funds are the best mutual funds to invest in for the long term. Opt for a growth mutual fund option to easily reach your long-term goals, as the fund's returns will compound over time.

Most of our experts agree that one of the safest places to keep your money is in a savings account insured by the Federal Deposit Insurance Corporation (FDIC). “High-yield savings accounts are an excellent option for those looking to keep their retirement savings safe.

High-Yield Savings Accounts

Deposits of up to $250,000 are insured by the Federal Deposit Insurance Corp., which ensures they are ultra-safe investments. A high-yield savings account is a type of savings account that typically offers higher interest rates than a traditional savings account.

Do no withdraw cash. Despite the recent uncertainty, experts don't recommend withdrawing cash from your account. Keeping your money in financial institutions rather than in your home is safer, especially when the amount is insured. "It's not a time to pull your money out of the bank," Silver said.

While these accounts may pay a higher rate of interest than a generic savings account, a major drawback of retirement money market accounts is that they may not earn enough interest to outpace inflation, meaning the account holder's balance effectively shrinks each year in terms of its purchasing power.

Investing as little as $200 a month can, if you do it consistently and invest wisely, turn into more than $150,000 in as soon as 20 years. If you keep contributing the same amount for another 20 years while generating the same average annual return on your investments, you could have more than $1.2 million.

Money market accounts work like other deposit accounts, such as savings accounts. As customers deposit funds in a money market account, they earn interest on those funds. Typically, interest on money market accounts is compounded daily and paid monthly.

Do money market funds pay dividends? ›

Money market funds invest in high quality, short-term debt securities and pay dividends that generally reflect short-term interest rates. Many investors use money market funds to store cash or as an alternative to investing in the stock market.

An indirect way you can lose money with a money market account is due to inflation. While money market accounts might earn more interest than traditional savings accounts, their interest rates might be lower than the rate of inflation.

Assets swept to the Vanguard Federal Money Market Fund are held by VBS, a division of Vanguard Marketing Corporation, member FINRA and SIPC. These assets are not insured by the FDIC, but are securities eligible for SIPC coverage.

Money market funds are divided into two categories: taxable and tax-free. If you're buying a taxable fund, any returns from the fund are generally subject to regular state and federal taxes.

Types of money market funds

Investments can include short-term U.S. Treasury securities, federal agency notes, Eurodollar deposits, repurchase agreements, certificates of deposit, corporate commercial paper, and obligations of states, cities, or other types of municipal agencies—depending on the focus of the fund.

What Are Some Examples of Money Market Instruments? The money market is composed of several types of securities including short-term Treasuries (e.g. T-bills), certificates of deposit (CDs), commercial paper, repurchase agreements (repos), and money market mutual funds that invest in these instruments.

Money market funds don't have the long-term growth potential of stock or bond funds; however, they are considered a more stable investment and can be especially useful for immediate- to short-term savings goals that you don't want impacted by market volatility.

Money market funds invest in highly liquid securities like cash, cash equivalents, and high-rated debt-based securities. Because they only invest in highly rated securities, money market funds offer a high degree of safety. Money market funds also offer investors higher yields than traditional savings accounts.

Like other deposit accounts, money market accounts are insured by the FDIC or NCUA, up to $250,000 held by the same owner or owners. Money market accounts tend to pay you higher interest rates than other types of savings accounts.

How much money can you put in a money market account? ›

Regardless of whether you bank with a credit union or bank, you can safely deposit up to $250,000 per account holder into a money market account and your money will be automatically insured as long as you are opening an NCUA or FDIC-insured account.

For the most part, money markets provide those with funds—banks, money managers, and retail investors—a means for safe, liquid, short-term investments, and they offer borrowers—banks, broker-dealers, hedge funds, and nonfinancial corporations—access to low-cost funds.

Risk. Both money market accounts and money market mutual funds are considered low-risk investment options. Of the two, the money market account is the lower risk, because it is simply a savings account with a high interest rate.

Money market investing can be very advantageous, especially if you need a short-term, relatively safe place to park cash. Some disadvantages are low returns, a loss of purchasing power, and that some money market investments are not FDIC insured.

Money market funds are divided into two categories: taxable and tax-free. If you're buying a taxable fund, any returns from the fund are generally subject to regular state and federal taxes.