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For investors, money market funds are useful vehicles that have a role to play in the management of an investment portfolio. However, you need to understand the nature of these funds in order to recognize how they fit into your investing objective.
What Is a Money Market Fund?
A money market fund is a mutual fund that invests solely in cash/cash equivalent securities, which are also often referred to as money market instruments. These investments are short-term, very liquid investments with high credit quality.
They generally include:
Securities and Exchange Commission (SEC) rules dictate that the average maturity of money market fund securities must be 90 days. Just like any other mutual fund, money market funds issue redeemable units (shares) to investors and must follow guidelines set out by the SEC. All the attributes of a mutual fund apply to a money market mutual fund, with one exception that relates to its net asset value. We'll take an in-depth look at this exception later on.
Money Market Funds Vs. Money Market Accounts
A key difference between money market funds and money market accounts is that the former are sponsored by fund companies and carry no guarantee of principal, while the latter are interest-earning savings accounts offered by Federal Deposit Insurance Corporation-insured financial institutions with limited transaction privileges. In this case, account principal is guaranteed up to $100,000 by the FDIC. Money market accounts usually pay a higher interest rate than a passbook savings account, but generally a slightly lower interest rate than a bank certificate of deposit or the total return of a money market fund. (For more insight, read Money Market Vs. Savings Accounts.)
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