Money Market Funds Explained: Is It For You?
If you have a sizable amount of money just sitting in your savings account that you
don't want to turn into stocks or bonds, placing them into a money market account can be a great strategy for earning a higher return on your money.
==> What is a Money Market Fund?
A money market fund is, as the name suggests, a fund that invests in the money market.
What is the money market? It's where people buy and sell money for different interest rates. Banks issue certificates of deposits, corporations issue bonds, countries issue treasury bonds.
A money market fund is a fund that invests exclusively in short-term low-risk money markets. In other words, you give your money to the fund and your money will be invested at the highest return possible for your money.
That amount is almost always higher than the standard interest rate.
==> What Are the Downsides of Money Market Funds?
Money market funds have a few downsides.
First of all, they're slightly less liquid than savings accounts. It takes a few days to get money out and there are usually limits on how often you can withdraw money.
Second, you don't know what your actual return will be. With a savings account, your interest rate is clearly posted for all to see. A money market fund doesn't have a set interest rate.
Instead, the bank will invest your money for you and give you whatever interest rate they get, minus their fees. This amount is still usually greater than the interest rate on a savings account, but if can be very hard to plan for.
Also, money market funds aren't FDIC insured. It's very, very unlikely that you'll lose all your money from a bank crash through money market funds, but if that does happen your money won't be protected.
==> Who Should Use a Money Market Fund?
Money market funds serve as a good medium between real investments and keeping money in your savings account.
With "real" investments like stocks and bonds, it's typically difficult to get your money out. Every transaction comes with a transaction fee and sometimes there might be penalties for withdrawing early.
With a money market fund, you can take your money out at any time. It's not as liquid as a savings account, but it's not illiquid as stocks or bonds.
In exchange for this extra liquidity, you lose some of the return on your money.
If you want to have a stash of cash that you can access at any time, yet don't want to settle for the interest rate you'd earn on a savings account, a money market fund is a good in between.
==> Where to Find a Money Market Fund
Most investment banks and even traditional banks have money market funds.
Start by talking to your bank to see whether or not they can keep your money in a money market fund.
If your bank doesn't offer money market funds, open an account with an investment bank like Charles Schwab or Merrill Lynch.
A money market fund isn't for everyone. But if you need to keep money in a liquid form while still earning a decent interest rate, a money market fund might be perfect for you.
by: Angel Noyal
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