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What are money market funds?

Is it a good idea to use them as a holding spot for cash in between investments?

Apr 10, 2012 by Arianna from Cheyenne, WY in  |  Flag
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7 votes

Money market funds are mutual funds that are most often invested in short-term cash equivalents. They are designed to preserve principal, be liquid and pay a little interest on your invested funds. They are also designed to maintain a per share price of $1.00 which reduces the risk that the value of your money market fund balance will fluctuate.

However, there is currently talk around the SEC about changing money market funds to allow a "floating" share price which would no longer peg the per share price at $1.00. Check out this recent article for more information about possible changes to money market funds:

http://www.cbsnews.com/8301-505123_162-57397729/sec-continues-push-to-change-money-market-funds/

Money market funds are generally considered a liquid, cash-like investment, however, if some of the changes outlined in article above happen, the characteristics of money market funds could change quickly.

Comment   |  Flag   |  Apr 11, 2012 from Atlanta, GA

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6 votes

Money market funds can be a great place to park money for a short amount of time.

When the stock market is extremely volatile and investors aren't sure where to invest their money, the money market can be a terrific safe haven.

Money market investing carries a low single-digit return, and when compared to stocks or corporate debt issues, the risk to principal is generally quite low. Money funds purchased at a bank are typically insured by the Federal Deposit Insurance Corporation (FDIC). However, money market mutual funds are not usually government insured.

Money market funds tend to be more liquid and that investors can buy into them and sell them with comparative ease.

Watch out for any account fees that may eat into your funds. Small annual fees or account set up fees, etc., can eat up a substantial chunk of the profit.

Comment   |  Flag   |  Apr 10, 2012 from Lititz, PA

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6 votes
Jesse Level 18

Money market funds can be a convenient place to park cash with one major caveat: make sure you understand the underlying securities in the fund before investing any money in it. Personally, when I use money market funds as a place to park cash I require they only invest in Treasuries or other government-backed securities. During the 2008 financial crisis some money market funds "broke the buck" - they lost principal value by declining below the $1 share price - because they were invested in relatively riskier securities. Taking on this greater degree of risk in reaching for an extra 10 or 20 basis points (0.1% - 0.2%) makes no sense to me.

Comment   |  Flag   |  Apr 11, 2012 from Bend, OR

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