What is the difference between municipal bonds and standard money market funds?

A:

The primary difference between municipal bonds - also known as "munis" - and money market funds is that municipal bonds are a bond issue, while money market funds are a type of mutual fund.

Municipal bonds are bonds that are issued by federal, state or local governments to finance capital expenditures. These bonds are usually tax-exempt at the federal, state and local levels. (To learn more, see Weighing The Tax Benefits Of Municipal Securities.)

Money market funds are mutual funds comprised of low-risk securities. The funds invest in government securities, certificates of deposit and commercial paper issued by corporations - all of which are extremely liquid and low-risk investments.

There are some money market funds that are primarily invested in municipal bonds, thus creating municipal money market funds. These funds bring together the tax benefits of municipal bonds with the stability, liquidity and diversification qualities of money market funds. All of these benefits tend to attract high income investors seeking a tax shelter.

The major risks associated with municipal money market funds are the possibility that short-term yields will drop and that their returns may not keep pace with inflation.

To learn more, see The Basics Of Municipal Bonds, Getting To Know The Money Market and Introduction To Money Market Mutual Funds.

RELATED FAQS

  1. Why is my bond worth less than face value?

    Find out how bonds can be issued or traded for less than their listed face values, and learn what causes bond prices to fluctuate ...
  2. How long will it take for a savings bond to reach its face value?

    Learn essential information about U.S. savings bonds along with an explanation of the unique characteristics of this popular ...
  3. When are treasury bills best to use in a portfolio?

    Understand the role that U.S. Treasury bills can play in an investment portfolio and why they represent one of the most liquid ...
  4. How are treasury bills taxed?

    Read about how the Internal Revenue Service collects taxes on treasury bills purchased from the United States government ...
RELATED TERMS
  1. Historic Pricing

    A method for calculating the value of an asset using the last ...
  2. Bear Fund

    A mutual fund designed to provide higher returns when the market ...
  3. Ulcer Index - UI

    An indicator developed by Peter G. Martin and Byron B. McCann ...
  4. Treasury Yield

    The return on investment, expressed as a percentage, on the debt ...
  5. Investment Company Act Of 1940

    Created in 1940 through an act of Congress, this piece of legislation ...
  6. Product Portfolio

    Investopedia explains: A Product Portfolio is the collection ...

You May Also Like

Related Articles
  1. Stock Analysis

    Why This Bond Fund Should Be in Your ...

  2. Stock Analysis

    Is PIMCO's Commodity Strategy (PCRDX) ...

  3. Stock Analysis

    Time to Look at PIMCO's Total Return ...

  4. Investing Basics

    Five Successful Investing Strategies

  5. Stock Analysis

    Government Bond ETFs: Pros and Cons

Trading Center