Money market funds aims at providing good returns within a short span of time. These are a class of mutual funds which in short term investment opportunities namely treasury bills, CDs and short term commercial debts. They basically target a time frame of around 1 -2 years. Money market funds are fast gaining popularity owing to the fact that they offer handsome returns which are safer and within a short duration of 1 -2 years. These are basically aimed towards developing a habit of investment within the people.
Money market funds are basically targeted towards providing a safe investment option for the smaller investors and develop a habit of investing in them. The principal always remains safe and small returns associated are merely because of the lower risk associated with these funds. Even though they are not secured under the FDIC, they are still safe investment options.
Depending on where the funds are invested under the money market funds, T-bills, short term CDs, the returns differ. Moreover there are investments made in the securities which are of two kinds.One which is tax-free investments often made in bonds by the state governments and the municipalities and the other which is in treasury securities which is not tax free. The yield on the tax-free funds are comparatively lower to that of the ones which attract taxes.
Money market funds are short term funds. One can withdraw funds from them as early as a day or two. It is so fast that one can offer check depending on them. These serve as the best for those who cannot afford to remain invested for a longer period and require funds every now and then.
There are a couple of risks associated with the money market funds.
€ They offer a very low return on investments which are often surpassed by inflation resulting in an actual devaluation of the funds.
€ Government securities like the treasury bills and bonds issued by the municipal corporation are subject to degradation by the rating agencies and hence the risk of reduced returns.
€ They are not insured by the FDIC like the most of the investment options.
Offering an average return of just 4-6% annually, money market funds often stands equivalent to the savings accounts. However, in the current scenario where investors are losing million on account of recession and worldwide slowdown, money market funds offer the safest way to keep your money parked and earn returns which can at least beat the inflation and keep the value of the investment from degrading.
Money market funds are mostly used for parking funds for better investment options. Investors normally dealing in stocks park their funds in these funds so as to delay their stock purchases. They wait for the appropriate time to invest funds but at the same time want their money to earn them some amount of returns.
Money market funds are slowly fading out of other funds which are similar in nature but offer better returns. Liquidity and safe returns are the major highlights of the money market funds and they offer great instruments to cover the risk and earn substantial income on investments.