A Brief on Money Market Funds and Why It Is a Safe Investment

Money Market funds are gaining popularity as they provide income in form of dividends. Added advantage is that, these funds have high liquidity and this is also considered as one of the safest bet in terms of mutual fund investments. It is common to see most people who have been in stock market business holding a large amount of their funds in money market funds. But, these funds are not insured by the US government as against the money market accounts that are offered in banks. The difference between the money market accounts and money market funds is that; the accounts are insured and the depositor is paid interest that is decided by the bank. On the other hand, for a money market fund the interest rate depends on the current rate of the market after deductions of the modest expenses.

It is not an exaggeration to state that investors who had invested in money market funds have not faced bigger losses in comparison to other investments. The reason being, most of the money market funds are invested in short-term IOU’s that have been issued by the American government or big corporations. Most part of the investment is done in commercial papers and short-term CDs. So when the fund invested does not have a term that is greater than 90 days, it is safe and the returns are quicker. So once the term of the IOU ends, it is paid off, along with the interest and then replaced by another fund.

Almost all financial experts consider investing in money market funds as a safe investment because the T-bills in which the funds are interested are considered the safest investment in US. Safety comes with the fact that the short-term debts are issued by major corporations and they cannot default on the debt as the credit rating of the company depend to a greater extend on the performance. Further, it also will reduce the borrowing capacity of the corporation. Another reason why it is safe is because, the funds are usually pegged as one share equivalent to $ 1 without any fluctuation and the investors are paid interest as dividends.
They also come with high liquidity as they can be easily withdrawn and no fee or charge is levied. But one disadvantage is that the, the interest rates are usually not declared like other investments that are done in the banks. The interest rates keep fluctuating as the holdings in the portfolio keep changing.