Moneyzine
/Investment Guides /Money Market Mutual Funds

Money Market Mutual Funds

Moneyzine Editor
Author: 
Moneyzine Editor
3 mins
February 8th, 2024
Advertiser Disclosure
Money Market Mutual Funds

As of November 2020, money market mutual funds account for nearly 1,000 of the more than 8,000 mutual funds available to investors. Even more impressive is the fact that money market assets account for around 20% of all mutual fund assets. That's nearly $4.35 trillion invested in money market funds alone. By law, a money market fund is defined as a mutual fund that is required to invest in low-risk securities. This means these funds are relatively low-risk investments compared to other types of mutual funds. They also pay dividends to shareholders that are aligned with short-term interest rates.

Money Market Funds

Money market funds invest in assets like certificates of deposits, government securities, commercial paper of companies, and other low-risk, highly-liquid securities. Unlike other mutual funds, they attempt to keep their net asset value (NAV) at a constant $1.00 per share. Don't confuse money market investing with money market deposit accounts found at local banks. For example, money market funds are not insured through the Federal Deposit Insurance Corporation (FDIC). Even though money market funds are not insured, they are still considered very safe investments because the fund's holdings typically include securities like Treasury Bills sold by the federal government. Since the government has the ability to raise funds to cover expenses through taxes, the likelihood of default on a government security is extremely low. That's why many financiers consider money market funds a "safe" investment. Just how safe are these investments? It is very likely that the U.S. government will pay all interest due on its bonds and bills. If the government were to stop paying on these obligations, U.S. citizens have bigger problems to worry about than the interest rate or dividend payment on a money market fund.

Liquidity

Money market funds are also considered very liquid investments. This means it's possible to take money out of an account on relatively short notice. There is also no penalty for taking money out of a money market fund, unlike banking instruments such as certificates of deposit (CD's), which can impose fees for early withdrawals.

Money market funds are not insured but considered very safe investments because the holdings typically include securities sold by the federal government.
Moneyzine EditorMoneyzine Editor

Investors oftentimes take these desirable attributes into consideration and use the fund as a safe haven for money in-waiting between investments. For example, they're a great choice for anyone looking for a place to hold their money when saving for a big purchase like a new home or even college tuition. It's possible to earn a competitive rate of interest, and virtually eliminate the possibility of putting the principal at risk. Money market funds provide the benefit of pooled investments, since individuals can participate in a more diverse, and higher-quality, portfolio than they could on their own. Like other mutual funds, each investor buying into a money market fund is considered a shareholder; a part-owner of the fund.

Interest Rates

After yielding around 2.5% or higher for many years, money market rates are starting to lose the interest of investors. In 2020, interest rates were hovering around 0.85%. This makes them a far less attractive alternative to bond funds, which are providing higher yields.

Top Money Market Funds

We're going to finish up with a list of money market funds paying the highest interest rates in the United States (October 2020). These funds have been ranked in terms of their 7-day yield, which is the typical performance benchmark.

Money Market Fund Interest Rates

Fund Name

7-Day Yield (%)

JPMorgan Prime MMF/Capital

0.88%

UBS Select Prime Preferred Fund

0.87%

Fidelity Inv Prime MMkt/Instit

0.86%

Morgan Stanley ILF/MMP/Inst

0.85%

BlackRock Liquidity: TempFund Inst

0.84%

Additional Resources

  • Buying an Index Fund
    An index fund is, by its very nature, a well diversified portfolio of stocks. Buying an index fund provides investors with an opportunity to diversify away the risk associated with individual stocks; thereby lowering the overall risk of their investment portfolio.
    Moneyzine Editor
    Moneyzine Editor
    January 9th, 2024
  • An exchange traded fund, or ETF, might best be described as a hybrid between a share of common stock and a mutual fund. In fact, because of the way ETFs are structured, they present some interesting options to both the novice and seasoned investor.
    Moneyzine Editor
    Moneyzine Editor
    September 20th, 2023
  • DIG and DUG Exchange Traded Funds
    Anyone interested in the oil and natural gas industry should be familiar with two very interesting exchange-traded funds: DIG and DUG. Given the historical volatility in the prices of crude oil and natural gas, investing in these two industries is a speculative play. But that's the intriguing part of DIG and DUG. In this article, we're going to talk about two ETFs that allow investors to trade in two energy products without taking a position in the commodities market. Part of that discussion will include a brief explanation of exchange-traded funds, followed by a specific discussion of DIG and DUG....
    Moneyzine Editor
    Moneyzine Editor
    January 16th, 2024
  • Fund of Hedge Funds and Hedge Funds
    The stock market is a simply amazing organization when it comes to creativity. Take hedge funds for example, they're not exactly mutual funds, and they're not exchange traded funds either. Technically, a hedge fund is defined as a private investment fund. They are usually organized as limited partnerships, and often employ non-traditional investment strategies. This means they often shy away from approaches that involve long-term buying and holding of securities in a portfolio.
    Moneyzine Editor
    Moneyzine Editor
    January 18th, 2024

Contributors

Moneyzine 2024. All Rights Reserved.