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. What's the difference between an individual retirement account (IRA) and a certificate ...

    Both individual retirement accounts (IRA) and certificates of deposit (CD) are useful savings instruments, but they have ...
  2. What is a triple tax-free municipal bond?

    At its core, a triple tax-free municipal bond is just like any corporate bond: it is a debt instrument, a loan given to a ...
  3. Is it a good idea to buy mutual funds from banks?

    Mutual funds offer consumers a great way to access a professionally-managed group of assets at a relatively low cost, with ...
  4. Besides a savings account, where is the safest place to keep my money?

    Savings accounts are safe because investors' deposits are guaranteed by the Federal Deposit Insurance Corporation (FDIC) ...
RELATED TERMS
  1. Bear Fund

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

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

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

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

    Investopedia explains: A Product Portfolio is the collection ...
  6. Sharpe Ratio

    A ratio developed by Nobel laureate William F. Sharpe to measure ...
comments powered by Disqus
Related Articles
  1. 10 Sources Of Nontaxable Income
    Taxes

    10 Sources Of Nontaxable Income

  2. The Treasury And The Federal Reserve
    Bonds & Fixed Income

    The Treasury And The Federal Reserve

  3. Municipal Bond Tips For The Series 7 ...
    Insurance

    Municipal Bond Tips For The Series 7 ...

  4. Introduction To Commercial Paper
    Bonds & Fixed Income

    Introduction To Commercial Paper

  5. Cut Your Tax Bill With Donor-Advised ...
    Taxes

    Cut Your Tax Bill With Donor-Advised ...

Trading Center