The basics of money market funds

The money market funds as the name suggests are funds which invest in money markets. These money market funds are governed by law so that the investments are such that the original principal is safe even if the dividends are very modest.

What are money market funds?

They are a type of mutual fund where the investors will earn an interest while the net asset value per share remains at 1 dollar. These funds generally offered by banks as well as brokerage firms usually comprise of short term securities which are highly liquid. The short term investment for under a year include such instruments as treasury bills, government securities, certificates of deposit and commercial paper. These are not generally used for long term investment and the biggest benefit with these money market funds is the fact that they provide highly liquid investment options for the investors while still earning interest out of it in the short term.

How do money market funds work?

Money market funds usually sell shares to the investors who get regular interest payments in return. The return on investment also depends on the interest rate level, commissions levied and the management fee. By law, money market funds have to ensure high liquidity and have a stable value. The money market funds can invest in return in another issuer for up to 5%.

Benefits of money market funds

There are certain basic characteristics of money market funds which make them a favorite with investors. To start with they are very safe as per government law too, which means those who are looking for a safe and secure investment option can always go for these money market funds to earn some interest too and leave their money safe. The liquidity of the money market funds is very high. This means that customers can withdraw money from the money market funds very easily with a short notice period. This will especially come in handy during emergency situations.

Interestingly, there is no fee or penalty levied for withdrawing money at short notice unlike CDs or mutual funds or most other forms of investment. Lastly the yields of the money market funds are competitive indeed, ranging between 4-6% a year. The interests are calculated every day which is a good way of keeping track of what the money is doing. The returns accumulated over a month are given to the investor at the end of the month.