Is the money market fund the right option to choose?

The world is run by money. We are in a never ending search for various means to make money in the simplest way. Once the funds are acquired the next step that pops to mind is investment. There are a number of schemes where one can invest in hopes of gaining high returns. These investment methods include certificates of deposit, savings accounts, fixed deposits to name a few. One of the basic principles on which the financial arena runs is, ‘higher the risks, higher are the returns’. If one dares to take risks on his investment he would gain higher returns in comparison to other options that are considered safe.

What is a money market fund?

Alls well in a bull market but when trends are bordering on a bear market, investors   may get apprehensive. The stability of a bear market is highly unpredictable. Interest rates plummet. Money market funds are short term investments; it is a mutual fund which invests in cash or cash equivalents. It is an alternative to high risk investments. The money market comprises of a group of financial institutions .the management of short term funds are carried out by them. The money market funds are often owned by fund companies. They are not insured by the FDIC. They offer no guarantee on the principle.

MMF comprise of certificates of deposit, commercial papers U.S treasuries Bankers acceptance and Repurchase agreements or other highly liquid low risk vehicles. The money markets aim to keep their net asset value above 1$ per share. According to the rules dictated by the Securities and Exchange Commission all investors, share owners must strictly adhere to the terms and conditions of the SEC. According to the SEC the minimum duration of maturity should be 90 days; it also states that investors who own mutual funds, the redemption should be paid within 7 days. The investment company act of 1940 has set the rules and regulations for the money market fund.

Money market funds can be categorized into 2 types, Taxable and tax free. With a taxable fund ones investments are subject to tax. In a tax free fund tax cannot be calculated on your investment. But the number of options proportionally reduces. They offer a lower yield.

Advantages

They mutual funds have a large margin of safety. They are highly stable investment options having a low initial investment. Accessibility surpasses all other advantages. They can be bought and sold at any time.