Money Market Mutual Fund: How Safe and It’s Returns
Money market funds have it all over bank savings accounts and interest-bearing checking accounts when it comes to being a good place to stash your savings. Money market funds are, in fact, a type of mutual fund, the difference being that the price per “share” sticks at $1 and never changes. That, from a purely technical standpoint, makes money markets riskier than checking and savings accounts. For one thing, unlike checking and savings accounts, money market accounts are not guaranteed by the federal government. In addition, it’s theoretically possible for a money market fund to fluctuate and, perhaps, lose some of its value.
If that worries you, relax. First off, particularly if you buy a money market from a large mutual fund company, there’s virtually no chance that the fund is going to go into the tank (larger fund families have the financial wherewithal to cover any sort of shortfalls). And, while there have been instances of money markets dropping a bit in value, the fund companies have always been there to make up the difference to ensure that the $1 per share price held.
A few random calls bear out just how better off you can be with a money market. For instance, a money market fund at a large, well-known mutual fund company was paying about 5% when I happened to phone them up. By comparison, savings returns at one local bank checked in at an anemic 2.42%, with the bank’s interest-bearing checking account even worse 1%, the equivalent of throwing your money into the air and hoping that it will somehow reproduce itself on the way down. You just can not maximize your returns.
Note that with money markets (and, for that matter, certificates of deposit), you’ll see a term we mentioned in the section on bonds: yield. You’ll note that this number usually differs from the quoted “rate” that a fund or CD is paying. All this means is that the fund or CD is paying dividends on the money you have in it, which in turn also earns money. Pay attention to yield when shopping for a money market mutual fund or a CD, since it tells you what your money will actually earn in a particular investment.
As we mentioned earlier, higher overall returns make a money market fund the ideal spot to build up a reserve of emergency funds. Money market mutual funds are also useful as a short-term layover spot for money that you intend to invest again, that keeps your money in the highest-yielding spot for the longest amount of time while limiting what you have in checking and savings, where it’s doing you no good whatsoever.
Bear in mind a few shopping tips when looking around for a money market fund. Some money markets require that any amount withdrawn from the account be of a certain minimum, often $250 or so. Other money market funds, which function more like a bank account (some, in fact, offer check-writing privileges) let you withdraw whatever amount your little heart desires. So choose a money market fund depending on what you want to use it for; if, for instance, you’re going to be paying monthly bills from it, go for the no-minimum money market fund.
Like other sorts of financial products, there’s also the issue of the minimum you have to put up to open up a money market account. Some fund families require you to deposit as much as several thousand dollars to get into a money market fund. However, as is the case with their other products, fund families also let you set up an automatic withdrawal program that can get you into a money market fund with nothing down and $50 or so taken automatically from an account you designate.