Investors with a focus on preservation of capital often seek out fixed income solutions, such as government or low-risk municipal bonds, preferred stocks, traditional bank savings products or money market mutual funds. Each of these investment vehicles provides a degree of safety from otherwise volatile securities markets in addition to a potential stream of fixed income. Although each strategy has its unique merits and drawbacks, a money market fund is a popular choice among risk-averse investors. A money market fund provides investors with an array of benefits not found in combination with other fixed income mediums, including liquidity, safety and yield.
Money market mutual funds provide investors with liquidity and safety by investing in relatively low-risk, short-duration securities. Fund managers invest pooled investor dollars into money market securities, including bank certificates of deposit (CDs), federal agency notes, high-grade commercial paper or government treasury issues, such as T-bills. The Securities and Exchange Commission (SEC) mandates that only securities with the highest credit ratings are available to purchase in money market funds, creating a degree of safety for investors not found in other fixed income investments. Money market funds are also highly liquid due to the short durations of a fund's underlying investments.
In addition to safety and liquidity, money market funds offer the potential for higher yields than conventional cash equivalents, such as savings or money market accounts offered through a bank or credit union. The objective of a money market fund it to keep its net asset value (NAV) at $1 steadily, resulting in no growth of principal. However, money market funds have provided investors slightly higher yields than conventional cash equivalents over time because fund managers can diversify the underlying investments.