How can money market funds replace your savings account?

Before you start reading this article, you need to be aware that it is necessary to have a substantial amount of cash in order to invest in a money market fund. If you do, you can go ahead and look at the reasons why it would be better to invest in a money market account than a savings bank account.

The safety that you will derive from a money market account is commendable. The fund manager will ensure that he invests only in financially reliable securities, which have a maturity period of less than four months. This will ensure that if the market were to fall, he can do a quick exit to prevent large scale damage.

The fees associated with maintaining a money market account is negligible when compared to a savings bank account. A savings bank account will require you to have a minimum balance and also pay transaction fees. A money market account on the other hand will only require an expense ratio fee, which is a percentage of the amount you invested. This is collected to pay for management expenses. It can range up to approximately 0.5% depending on the type of fund.

While a savings bank account can give you just around 1% interest rate, a money market fund can give you up to 3% in returns. This does not guarantee you will receive the 3%, but it does mean that your chances of getting 3% are higher on a money market fund.

Money market funds will also provide you access to your money during the term period. Unlike treasury bills and certain certificates of deposits, you can withdraw your money at any time without incurring a penalty.

There are also a number of tax benefits associated from investing in money market funds. If you invest in certain funds such as a US treasury money market fund, which is managed by the government, you can receive tax deductions for the amount of money invested in the fund. The Vanguard money market reserves treasury portfolio, is a classic example of such a fund. Even when you receive the dividends, you can have it tax free if you reinvest it in a fund or any other investment commodity. If you do not do so, it will be considered as long term capital gains and is subject to be taxed.