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Introduction To Money Market Mutual Funds
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Posted: Sep 10, 2010 | Reprints
FILED UNDER
MUTUAL FUNDS
Investopedia Staff
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Investors interested in the money
market can access it most easily
through money market mutual funds,
but these vehicles do not let smaller
investors off the hook when it comes to
having a rudimentary understanding of
the Treasury bills, commercial paper,
bankers acceptances, repurchase
agreements and certificates of
deposit (CDs) that make up the bulk of
money market mutual fund portfolios.
In this article, we'll show you how
money market funds work and how
they can benefit you.
Purpose of Money Market Mutual
Funds for Investors
There are three instances when money
market mutual funds, because of their
liquidity, are particularly suitable
investments.
Money market mutual funds offer a
convenient parking place for cash
reserves when an investor is not
quite ready to make an investment
or is anticipating a near-term cash
outlay for a non-investment
purpose. Money market mutual
funds offer ultimate safety and
liquidity. This means that investors
will have an expected sum of cash
at the very moment that they need
it. (For more on this, read Get A
Short-Term Advantage In The
Money Market.)
An investor holding a basket of
mutual funds from a single fund
company may occasionally want to
transfer assets from one fund to
another. If, however, the investor
wants to sell a fund before deciding
on another fund to purchase, a
money market mutual fund offered
by the same fund company may be
a good place to park the proceeds
of sale. Then, at the appropriate
time, the investor may exchange his
or her money market mutual fund
holdings for shares of the other
funds in the fund family.
To benefit their clients, brokerage
firms regularly use money market
mutual funds to provide cash
management services. Putting a
client's dormant cash into money
market mutual funds will earn the
client an extra percentage point (or
two) in annual returns above those
earned by other possible
investments. (To read more about
the money market, check out The
Money Market tutorial.)
Operational Details of Money
Market Mutual Funds
Money market mutual funds are
designed to offer features that are
particularly suited to the needs of
small investors. Minimum initial
investments generally range from $500
to $5,000.
You can purchase money market
mutual funds directly from brokerage
companies or mutual fund firms, just
as you would purchase a stock or
equity mutual. As investment advisors,
some banks also sell money market
funds and some even have their own
proprietary funds that offer money
market investment
opportunities. These should not be
confused with money market accounts,
which are interest-earning savings
accounts.
Money market mutual funds also offer
some simplified withdrawal features
that are more typically associated with
bank or trust accounts. For example,
money market funds allow investors to
withdraw assets by writing checks,
usually of a minimum amount
around $500 per check. If the investor
does not want to write a check as a
means of withdrawing funds, he or she
can easily redeem shares by
requesting payment by mail or by
remittance through a wire transfer to
his or her bank account.
Categories of Money Market
Mutual Funds
Money market mutual funds may
contain a specific type of money
market security or a combination of
securities across a wide spectrum:
One particular type of fund limits
its asset purchases to U.S. Treasury
securities.
Another class of money market
funds purchases both U.S.
government securities and
investments in various government-
sponsored enterprises (GSEs).
The third and largest class of
money market mutual funds invests
in a variety of money market
securities that offer the highest
degree of security.
Another important categorization for
money market mutual funds relates to
their taxable or tax-exempt status.
Taxable funds invest in securities such
as Treasury bills and commercial
paper, whose interest income is
subject to federal taxation. Tax-exempt
funds invest exclusively in securities
that are issued by state and local
governments and are exempt from
federal taxation. Tax-exempt funds
generally appeal to investors in higher
federal tax brackets who are seeking
tax savings on the overall interest
income generated by their portfolios.
Tax-exempt money market mutual
funds have the potential to offer a
triple-whammy tax reprieve for some
investors! Some tax-exempt funds
purchase only securities issued by
governments within a particular state.
If an investor can find such a fund for
his or her home state, that investor
can earn interest income that is
exempt from federal, state and
perhaps even local income taxes.
Conclusion
Just as equity and fixed-income mutual
funds have greatly simplified the world
of investing, money market mutual
funds have made money market
investing accessible to individual retail
investors. Money market mutual funds
are among the safest and most liquid
financial instruments widely available.
Moreover, money market funds offer
modest initial investment requirements
and provide simple procedures for
withdrawing funds by check or
transfer to a bank account. Finally, if
they choose carefully, purchasers of
certain tax-exempt money market
funds may also enjoy relief from
federal, state and even local taxation.
For further reading, see Getting to
Know The Money Market and The
Money Market: A Look Back.by Investopedia Staff
Investopedia.com believes that individuals can excel at managing their financial affairs. As such, we strive to provide free educational content and tools to empower individual investors, including thousands of original and objective articles and tutorials on a wide variety of financial topics.
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