Money Market Funds 101

In an investing world that is often exciting and fast-paced, money market funds rarely elicit the same thrill. They can, however, provide a calming element to your portfolio. Here’s what you should know about them.

Mistaken Identity

Money market funds* are a pool of short-term securities typically managed by investment company asset managers. Although designed for safety and to preserve their value at $1 per share, these funds do not offer guarantees. This differs from money market accounts, whose principal is typically guaranteed by the Federal Deposit Insurance Corporation.

Money market funds have also undergone some change in recent years. When held by institutions, they are no longer required to maintain a stable $1 per share. Additionally, money funds may prevent withdrawals or charge an extra withdrawal fee during very volatile periods.**

Parking Spot

For most individual investors, however, money market funds offer the same features they always have. Often referred to as a “parking spot” for investors who want time to decide where to invest contributions, money market funds can offer relative safety and liquidity, especially when equity and bond markets experience volatility.

The tradeoff is you can typically expect a very low rate of return on your money market fund shares. If that rate is lower than the rate of inflation, you can lose purchasing power. If you’re looking for potentially bigger returns without sacrificing a lot of stability, you might want to look at funds offering short-term government debt securities. If you opt for this choice, you should know that even if a fund owns U.S. government-guaranteed securities, the fund itself can’t offer the same surety.

Weigh Your Options

As with any investment choice, you should consult a financial professional to learn more about your options. And don’t forget to note the effects of taxes and fees when comparing money market mutual funds.

* An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the fund may seek to preserve the value of your investment at $1 per share, it is possible to lose money by investing in the fund.

** The Fund’s sponsor has no legal obligation to provide financial support to the Fund, and you should not expect that the sponsor will provide financial support to the Fund at any time.