Money Market Funds Explained

When it comes to investing, there are a lot of different types of funds that you can purchase out there. There are mutual funds which contain stocks, bonds, real-estate and other investments. One of the many types of these funds is money market funds, which invest in short term debt. Continue reading to learn what they are, how they work, and what you might expect to earn from a money market account.

Essentially money market funds are a type of mutual fund which maintains its value by buying short-term investments such as certificates of deposit, short-term commercial debt, and treasury bills. Generally these investments mature in less than one year. By law, money market funds are required to provide safe and liquid investments while providing rates of return a bit better than that than the typical savings account.

Money market funds should not be confused with a money market account. With a money market fund, you are buying shares of a mutual fund. Whereas with a money market account, you are opening a savings account, and your money in that savings account is invested into a money market fund. These two different ways to get into the money market serve two different purposes. If you have an investment account, and believe the stock market is going to go down, you could buy into a money market fund and get some rate of return while the market tanks. If you want a place to store money for emergencies or other savings, a money market account is the way to go.

The primary investment strategy of money market funds is to preserve the principal investment by keeping the share price around $1.00. Money market funds are not insured by the FDIC as savings accounts are, however they are considered very safe investments. There has only been one case that a money market fund has gone below $1.00 a share and investors lost money, and then shareholders still got 94% of their value. The reason the fund in question, the Community Bankers US Government Money Market Fund, lost money was because they had over-invested in derivatives. Since then, money market funds learned from that mistake and since then no other money market fund has lost money.