Money market funds and the types you can choose from
Money market funds are mutual funds that invest in low risk debt securities. These mutual funds invest mainly in money market instruments or MMI. Money market instruments or MMI are debts that have a maturity period of less than one year. These funds have higher liquidity and are mostly risk free. The motto of the money market funds is to protect the principal amount of the investor while producing a good return. Interest rates offered on money market funds are very important to ensure higher yields.
Features of Money Market Mutual Funds
- Money market funds are the safest of all the mutual funds. They typically spend in certificates of deposits, government securities and government securities. In money market funds Net Asset Value or the NAV of the investment is tried to be kept at a fixed rate of $1 for every share even when the investments fail to perform. This makes the money market funds secure and the risk factor is very low.
- These funds are regulated by the Investment Company Act that was established in 1940.
- Dividends are paid to investors when the fun performs well in the market.
- These are open ended mutual funds that are a good source of liquid money to the different intermediaries.
- In general huge investments are required for investing in money market instruments. This might not be possible for the common retail investors. Here money market funds step in to provide the retail investors the opportunity to invest in the instruments as per their capacity and benefit from the high yield.
Types of money market funds
Money market funds are of two types:
- Institutional money market funds- The funds in these types of mutual funds are held by corporate houses, Institutional investors and government securities. The amount of money parked in institutional money market funds is large. These mutual funds are a source of transferring money to large corporate houses from the company’s primary operating account. Since this type of funds are of high value so individual investors are not able to invest in these funds.
- Retail money market funds- These fund are distributed to individual investors. The fund value is lower than as in case of Institutional money market funds. This type of money market fund is used basically to deposit money that might need in the near future. The retail money market funds can be of the tax free type as well as government and non government types. Government money market funds are usually tax free. Higher yields are earned from non government retail money market funds.