What are the disadvantages of money market funds?

In the amazing range of choices available to a potential investor today, money market funds stand out as safe and secure options offering high liquidity and moderate to low returns on investment. If the investor is not too aggressive in seeking very high returns from his investment, then a money market fund is a good mutual fund in which to park his surplus funds for some time. But like every good thing, a money market fund also has certain drawbacks, and one should be fully aware of these demerits and invest accordingly, after making allowances for those disadvantages. Let us look into three such disadvantages and explain some steps one can take to balance these disadvantages while investing in money market funds.

Low Transaction Limits 

Money market funds permit very few free transactions per month, so that the funds can be invested in higher tenure papers and thereby earn higher interest for the investor. For instance, most money market funds allow only 3 to 5 checks to be issued per month, beyond which charges could be levied. The way out is to have the money market fund as a secondary account in which the investor doesn’t need to access his funds for a considerable amount of time. The primary account should be a checking account which allows many more transactions per month even though no interest is paid on such an account.

Low Interest Rates 

When compared to other market linked investments or even term deposits or government securities, many money market funds offer much lower interests, since their main priority is to preserve the capital and maintain the net asset value at $1. First, one can purchase this fund from a brokerage firm which might be able to negotiate for better rates on your behalf on account of the higher volume of business they generate. Second, you should have a reasonable mix of high returns and low risk in your total investment portfolio. This will help in averaging out the low return investments and give you a better overall return on investment.

High Fees 

Unlike many savings and checking accounts which have the option of negotiation for getting a charge free product, most money market funds have high annual fees which eat away a large portion of your investment upfront. The solution to this is to scout around for the fund which offers the best rate, so that the impact of the annual fees can be reduced.