Understand How Money Market Account Mutual Funds Work
written by: Faith Oh•edited by: Rebecca Scudder•updated: 12/31/2010
Mutual funds for many are a corner stone of their investment strategy. This article narrows in on the class of investments known as money market mutual funds - what they are, how they work, how to search for them and the level of risk involved.
slide 1 of 4
A mutual fund is an investment pool in which a group of people pool money together to invest in a diversified group of securities or investments. The fund is usually managed by a fund manager or investment adviser who makes decisions about what, when and how to buy and sell. All investors in the fund share the profits and the losses as well as pay a fee to cover the management costs. Many mutual funds are grouped according to industry, so you can have a fund that invests in the oil industry or other examples such as foreign stock funds or for that matter, money market funds.
Mutual funds are also classified as load or no-load mutual funds. Load mutual funds charge a commission while no-load mutual funds are commission free.
slide 2 of 4
Money Market Mutual Funds
You might wonder how money market account mutual funds work. A money market mutual fund is a low-risk, low-return, mutual fund that invests in short-term debt securities such as those of the federal government, banks and highly-rated big companies. The rate of return is very low (about 4 to 6 percent) and after deducting fees associated with it, there may not much money to be made. That is why investing in a money market fund is only good for packing cash short term, such as cash being kept for the purchase of a car or a home, and for which you need immediate access to.
Money market funds can be taxable or non-taxable. Non-taxable money market funds usually invest in state and local government debt obligations.
slide 3 of 4
Investing in Money Market Mutual Funds
When investing in money market funds it is important to do your research. It is also vital that you make your decision on what fund to invest in based on not just how much return you'll get but also on how much you will lose in fees. In addition, with the abundance of money market accounts and high-yield savings accounts available, a money market fund may not be the best option for you. It all depends on how much you have to invest and for how long you can have the cash tied down. Yahoo Finance provides good tools to search for money market funds in the form of its Fund Screeners and Top Performers tools. Also use the resources below to help in your research.
It is important to note the difference between a money market fund and a money market account (MMA). While they are both low risk, a money market account is usually an FDIC-insured, high-interest investment held in a bank. Currently money market accounts are insured up to $250,000 per bank per depositor. An MMA can be used as a checking account but there is a limit to the number of withdrawals that can be made each month. The market determines the interest rate that an MMA pays.