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The Risk of Money Market Funds

So you're thinking of investing money in mutual funds? Then the safest place for your hard earned dollars may well be in money market funds. They are considered the best mutual funds for security, even though they don't generate as much return as other mutual funds. The main aim of money market funds is protecting the money of its investors. Whilst they don't offer as much potential for growth as other mutual fund investments, they are a relatively safe place to invest your money. The short term nature of the money market funds adds to the security of this investment. There is some risk in money market funds, as with any investment, so it's helpful to look at money market funds from all angles before you jump in.

Mutual Funds Are the Safest Money Market Funds

The money market generally requires a significant initial investment. Money market funds are perfect for those of you who have a little less money to work with. Money market funds require even less initial startup money than most mutual funds. Money market funds let you get a foot in the door of investing with very little risk.

The small amount of gain that is made from money market funds is made through short-term money loans. By investing in short term debt, risk is reduced. These loans can have terms between one day and one year. Money market funds issue shares to investors and are bound to act by the Securities and Exchange Commission. Share prices are maintained at around one dollar by paying out earnings to the shareholders and avoiding capital gains. The average term of money market securities is around 90 days. Share prices rarely fall below this one dollar mark.

Where To Find The Best Mutual Funds

Two important distinctions need to be made between categories of money market fund. Money market funds can be taxable or tax-free. Those that are tax-free are government or municipal funds. Taxable money market funds that are offered by mutual funds are insured privately. Government money market funds only make loans to government agencies. Municipal money market funds will only loan to state and local governments and agencies. A money market fund that only makes loans in your own state will generally be free from tax. It's important to calculate whether avoiding taxes with tax-free funds will lead to a greater return on your investment of not, because these tax-free funds have slightly lower returns.

The Safest Bet Is Money Market Funds

Money market funds can be the best mutual funds for investors who require particularly liquid investments. For anyone who isn't quite ready to invest, money market funds are mostly predictable and you will be able to predict your income from your investment. These funds are a good place to hold cash that is pulled out from other investments if it is needed in the short term. There will still be earnings from the investment, with the added bonus of being able to pull money out when it's needed. Money is simpler to withdraw from money market funds, similar to withdrawing money from a bank or trust. Payment to the investor can be made through the mail, wire transfer or cheque.

Money market funds are low-risk, but no investing is entirely risk free. Shares have only a few times fallen below the one dollar mark, so whilst it is unlikely money can be lost through money market funds. You need to be aware that the lower returns from money market funds can be eaten up by the management fees. Money markets aren't big earners and shouldn't be your only investment, unless you are in need of highly liquid assets. They are most appropriate for parking funds temporarily and to accumulate cash that is needed in the short-term.

Money market funds have made money markets accessible to mainstream investors by pooling financial assets, similar to mutual funds. Mutual funds offer you the opportunity to pool resources with other investors. Mutual funds reduce risk to the individuals hip pocket by spreading out investments over are variety of investment types. Money market funds are the safest investment within mutual funds.