Money market funds are mutual funds designed for low-risk, liquid short-term investments. They typically offer companies that invest in other money market instruments and almost always consists of highly appreciated securities. Investors can choose between municipal funds, state-level, borrowed funds, budgetary funds or funds that focus on private commercial operations in the money market.
Making money in the market?
The market can be described as the money market if it consists of highly liquid, short-term assets. The repayment period shall not exceed one year on the tools, and they can be as short as one day. This includes assets such as certificates of Deposit (CDs), interbank loans, money market funds, Treasury bills (t-bills), repos, commercial paper and short-term securities and loans.
The fed monitors money markets through the flow of funds survey. It is standard for money market accounts for almost a third of all mortgages in the US.
Money Market Funds
Money market funds were developed in the 1970-ies to provide the ability to purchase a “group,” securities, which normally provide a higher yield interest-bearing Bank accounts, whereas a significantly lower risk than ordinary investments. The product is quickly growing in popularity; currently about 2.9 trillion dollars in assets, invested in these money market funds.
Money market funds typically invest in government securities, certificates of Deposit, commercial paper of companies and other highly liquid low-risk securities. The funds attempt to keep their net asset value (NAV) at a constant $1 per share, and, as a rule, only the yield fluctuates. Losses of investors in these cars are quite rare, but not impossible. Money market per share NAV may fall below $1 if it investment to perform extremely poorly.
In contrast to the cash account in the market of Bank deposits, money market funds are not insured by the government, but their activities are regulated by the sec in accordance with the Law On investment companies of 1940. These regulations prohibit money market funds from acquiring any investment that is not a short-term, means that the money market Fund may receive the full amount of principal and interest within 397 days. Money market investments should also have minimal credit risk and be highly appreciated or comparable in quality to highly rated securities.
There are several basic types of money market funds, and each includes different types of investments.
Funds U.S. Treasury
As the name implies, funds that the U.S. Treasury invests in Treasury money. They offer lower yields than other types of money market funds, but they also offer the least risk. In addition, they are exempt from tax. The Treasury funds are good for investors with low risk tolerance who want to make a cent or two more than they earn in interest-yielding Bank account.
U.S. government and Agency funds
U.S. government and Agency funds invest in bonds and notes of Federal bodies of state power, guaranteed by the Treasury and Congress. Some also invest in foreign markets, emerging markets and mortgage-backed securities. These funds are a bit riskier than funds of the U.S. Treasury, but they offer slightly higher yields as well. As funds of the U.S. Treasury, they are exempt from tax.
Diversified Taxable Funds
Funds that are not targeted at government securities, tend to have higher ratios of expenditures, but they are known to return more interest income. Diversified taxable funds invest in American corporations and commercial paper of foreign companies, such as REPO. Some also invest in deposits issued by foreign banks. Diversified taxable funds are more risky than many other money market funds but have higher yields. As the name implies, their income is taxed.
Tax-free funds invest in short-term tax-exempt securities of local and state authorities. Of course, these funds are not exempt from paying Federal taxes. They can be quite complicated. Some of them don’t invest beyond a single state. They are also risky types of mutual funds. Tax-free funds best suited for investors in higher tax bracket or those who live in high tax States. For example, T. rowe Price offers a new tax-free York money Fund (NYTXX), which is trying to build a short-term, liquid asset portfolio, exempt from Federal, new York state and new York city income tax. This is just one of several new taxes-a big York money. Such funds are in the States of California, Maryland and other high tax States.
While money market funds are safe, their long-term yield is lower than that of bonds and is significantly lower than equities. As such, money market funds are typically used as storage space for cash, or at the expense of investors and institutions when they expect investment opportunities, or elderly investors who value security over growth. They can also be used as an alternative to traditional savings accounts for investors in a low interest rate, or may be included in a distribution of assets sufficient to ensure balance in the portfolio.