Have you ever scratched your mind thinking: what could be the best alternative to the bank to get handsome interest on your savings? If yes, stop pressing your mind any more as a money market fund is available to help you to grow your money.
You probably have heard about mutual funds. If yes, then you easily can understand- What is a money market fund? To help you understand the meaning and working principle of the money market fund, I am going to answer some of the most frequently asked questions related to it. So, let's look at answers to the following questions.
What is the definition of money market funds?
It is a type of mutual fund which produces fixed income. The best part of this fund is that it is invested to buy reliable debt securities, certificates of deposit, commercial papers, U.S. treasuries. Also, a large part of this fund is invested in bankers’ acceptances and repurchase agreements.
Now you might be thinking that money market funds and mutual funds are the same things. Right? That's not true! If you get a closer look, you will find some key differences between mutual funds and money market funds. Money market funds are used to buy short-term financial products and assets. On the other hand, regular mutual funds are long term investments.
It is also worth noting that money market funds offer redeemable shares to investors. Just to inform you that while buying a redeemable unit or share, investors have to follow the terms and conditions imposed by the SEC. In all other ways, the money market fund is the same as mutual funds.
What are the money market fund examples?
There are four types of money market funds which I have mentioned below.
U.S. Treasury Funds: As the name implies, this kind of funds invest in treasury funds. U.S. treasury funds produce lower income. But, the benefit of this fund is that it poses a lower risk at the same time.
U.S. Government Funds: These funds enable investors to buy bonds, notes of the federal government, U.S treasuries, and congress. Also, with the help of this fund, you can invest money in foreign markets and a broad range of securities. In comparison to treasury funds, U.S. government funds are less risky.
Diversified Taxable Funds: Such kinds of money market funds are more likely to be invested in buying the shares of foreign companies, commercial papers, and repurchase agreements. Also, it can be used to invest in U.S corporations.
Tax-Free funds: As the name suggests, in such kinds of funds investors get the exemption from all federal taxes. Also, the state government doesn’t impose local taxes on investors who invest their money in such kinds of funds. The best example of this fund is the New York Tax-Free Money Fund (NYTXX).
In general, money market funds could be divided into two parts: lower-risk funds and higher-risk funds. If capital is invested under money market funds to buy treasury bills and CDs, you can call it lower-risk funds.
On the other hand, if investors invest funds to buy commercial paper such as corporate debt foreign CDs, you can consider it as a higher-risk money market fund. These kinds of higher-risk funds produce both risks and benefits. As we all know that in our volatile market interest rates can drop anytime without any hint, think twice before going with a high-risk fund. But, at the same time, when interest rates increase, investors get fat income as well.
That was all about money market funds. In short, we can say investing money in lower-risk funds is far better than just leaving your money in your bank. However, it is not a bad idea to invest some portion of your money in higher risk funds such as commercial papers and corporate debts. For more information and any kind of assistance, you can reach us at any time.