Money market mutual funds are mutual funds that invest in very short-term, highly liquid securities which are considered safe havens such as government securities or T-bills, certificates of deposit, and commercial paper.
The funds are easily accessible and are as good as savings accounts in terms of liquidity.
Money market mutual funds usually come with free checks or an ATM card for easy access to cash. There are various other benefits including: -
- Anytime withdrawal without penalty unlike a CD which has a minimum holding period and early withdrawal penalties; easy redemption processes, either online or by phone.
- Easy set up; it can be initially funded by linking to the checking account.
- Money market funds are considered cash equivalents.
- They are considered safe instruments as the SEC requires that money market funds invest as much as 95% of their assets in “first-tier” securities such as T-bills and top rated privately-issued paper.
Money market mutual funds
The returns are often higher than on money market accounts than on savings. Further, investors can link their brokerage money market funds to their stock or bond funds and “sweep” dividends or interest paid on the latter investments into the money market funds to start earning returns immediately. Proceeds from stock or bond sales can be “parked” in the money market funds until new opportunities are found.
Investors in the higher income brackets may benefit from tax-exempt money market funds which invest in bonds and securities issued by municipalities and state governments.
There are some risks in that the NAV can fall below $1.00, although that is rare, and some money market funds will charge a management fee. Further, some brokerages require minimum amounts for money market funds e.g. in the case of Charles Schwab, minimum investments start at US$2,500. The higher the investment and the minimum balance maintained, the more attractive the yield. Some online providers forgo the minimum.
Money market funds are regulated by Rule 2A-7 of the 1940 Investment Company Act, and as a rule, redemptions have to be paid out within 7 days.
If you are looking for a bit more risk and return then check out this article on high yield money market funds.