Availing a short term advantage in money market funds

Most of the investors think about capital market investments through bonds, shares and stocks. Because these investments are more secure and the money market is often far away from the top list of unsecured investments, investment in money market funds is an additional invention of secured investments. But what is a money market fund?

Money market fund refers to an investment in a market that offers liquidity for investors by dealing in short terms borrowings like T-bills, certificate of deposits, other type of instruments that have duration of less than a year. The following are the advantages that can be availed through investing in money market funds.

Safe investment

Most of these funds are offered with relatively low rate of returns. But it can be a great way for investors to preserve the amount invested and even to make little amount of extra money. For instance, consider you have lost a good deal of money out of stock investment and you are yet to decide the proceedings with the future investments. In such circumstances, investment in money market is considered a relatively safe place for protection along with earning an annual return of minimal amount without absorbing any risk. All investments made in money market are secured and covered with FDIC insurance. FDIC insurance offers coverage for a maximum amount of $250,000 for a single investment.

Hedging

Money market enables for hedging against declines or fluctuations in market. When the stock market or investments in bonds are fluctuating, the investor can liquidate the account and proceed to receive the settlement or as an alternate, he may earn nominal amount of interest from the investment made in money market funds. Money market is the biggest investment markets where the big banking institutions keep their funds in alternate deals as well as the smaller municipalities invest their proceeds from the debts offered.

Liquidity

The attractive feature and the biggest advantage of the money market fund is liquidity, as numerous entities invest their capital funds in alternate deals or as a hedge. It means that when an investor wants to liquidate fund invested in money market, they can convert the funds into cash by undergoing very simple procedures. Moreover, the funds invested in money markets generally do not exceed more than a year and the minimum period of investment commences from three months to maximum of one year. Hence, it will be easier to get the amount invested in a shorter period.

Higher Rate of return on investment

Even though the interest rate is lower as compared to other investments, the rate of interest offered by money market fund is obviously higher than the interest rate offered by a typical savings account. The rate of interest offered by money market fund account is determined by the amount of investment made in money market and if the investment is higher the interest will be higher and vice versa.

Irrespective of risks involved in every investment, money market is the best possible and safest place for investing the funds. The only risk involved is opportunity cost i.e. the funds invested in the money market account could have fared better if invested in different securities like stock or bond.