Table of Contents Hide
- What Is a Money Market Fund?
- Are Money Market Funds Safe?
- What Is a Money Market Fund Account
- List of Best Money Market Funds
- What Is an Example of a Money Market Fund?
- Is Money Market Fund a Good Investment?
- What Is the Point of a Money Market Fund?
- Can You Withdraw From a Money Market Fund?
- What Are the Four Types of Funds?
- What Are the Risks of Money Market Funds?
- How Much Money Do You Need to Start a Money Market Fund?
- What is better than a money market fund?
- Is Money Market Safer Than Savings?
- Who Should Invest in Money Market Funds?
- Related Articles
Banks, brokerages, and mutual fund firms all provide money market funds, commonly referred to as money market mutual funds, as a way for customers to save and invest money. These investments are regarded as low-risk ones that can be used to achieve short-term financial objectives or start an emergency fund. Read on to learn more about money market fund account and the list of best money market funds.
What Is a Money Market Fund?
A money market fund is a form of mutual fund with historically lower returns and relatively low risks compared to other mutual funds and most other assets. Money market funds make short-term debt investments in high-quality securities and distribute dividends that typically reflect short-term interest rates.
Money market funds invest in short-term debt assets with low credit risk, such as Treasury bills, bank loans, and short-term corporate and municipal bills. Securities for the money market often have maturities of less than a year. The securities’ short-term nature helps to lower risk and uncertainty. A fund manager makes the choice of money market investments, taking into account the type of money market fund. Money market funds are not kept safe by the Federal Deposit Insurance Corporation (FDIC), but money market accounts are.
Furthermore, dividends are a common way for money market mutual funds to make money. Depending on the types of securities the fund bought, dividends may or may not be taxed. Due to the funds’ liquidity and adaptability, businesses can utilize them as a cash management tool, which accounts for their appeal.
Types of Money Market Funds
The Securities and Exchange Commission (SEC) has divided money market funds into three types according to the kinds of securities they hold: They include
About 99.5% of the investments made by the funds are in assets backed by the government, like Federal Home Loan Securities, collateralized U.S. Treasury Securities, repurchase agreements, and U.S. Treasury Bills. Additionally, they make investments in the securities of GSEs like Freddie Mac and Fannie Mae. Because of the “risk-free” government-backed paper, people believe their money is very safe.
Most of these funds are put into short-term corporate debt instruments, such as short-term bank securities, corporate notes, and commercial paper, such as banker’s acceptances and certificates of deposit. They also encompass reverse and repurchase agreements.
#3. Municipal tax-free
The majority of the securities held by money market funds are municipal securities, which are frequently exempt from both federal and state income taxes. The money funds participate in the issuance of other entities’ tax-sheltered securities, such as state municipal securities.
How Money Market Funds Work
Money market funds must invest in short-term debt instruments like certificates of deposit, U.S. Treasury bills, and commercial paper in order to comply with Securities and Exchange Commission (SEC) regulations. However, there is no assurance that a fund will be able to do that. The funds have historically attempted to maintain a share price of $1, and there have only been two cases where a fund fell below that price.
Money market funds must buy securities with terms of 13 months or less, or sometimes 25 months if the investment is a government security. A fund’s portfolio must have a weighted average maturity of 60 days or less. These rules make sure that the portfolio won’t be limited by long-term investments and help to keep money market funds liquid in general.
Reasons to Invest in Money Market Funds
Money market funds may suit risk-averse individuals who want to protect their savings. The money will generate a higher return than bank savings accounts but be less volatile than stock market investments.
In addition, you can write checks and make money payments with money market funds, but most accounts have a minimum check amount. Ask your bank if you have to pay a fee if your account balance falls below a certain level after a certain number of withdrawals.
Are Money Market Funds Safe?
Money market funds invest in low-risk securities with quick maturities, making them comparatively secure. Despite this, they nevertheless represent a risky investment in securities. Money market funds are safe, but you shouldn’t hold on to them for too long. Because they mature in 13 months or less, the funds are liquid and offer more access to your money than longer-term investments. The contrast between money-market accounts and money-market funds is a critical one for investors to understand.
Banks and other financial institutions provide money market accounts as interest-bearing savings options. The FDIC insures these accounts for a maximum of $250,000 per depositor and per insured bank. Money-market mutual funds (sometimes known as money-market funds) are not. Knowing which choice is best for you and your investment objectives is crucial.
How to Invest in Money Market Funds
There are several ways to invest in money market funds. You can invest in mutual funds directly from a company like Vanguard or BlackRock, through a bank, or via your online brokerage account. The online broker that most likely has funds available from a variety of providers will give you the most possibilities. Hence, if you want to use the money as part of a retirement plan and pay less tax on gains and withdrawals, you might want to get it through a regular or Roth IRA.
What Is a Money Market Fund Account
A money market fund account is a form of mutual fund with historically lower returns and relatively low risks compared to other mutual funds and most other investments. Money market funds make short-term debt investments in high-quality securities and distribute dividends that typically reflect short-term interest rates. Investors also use money market account fund as a form of cash management or as a substitute for stock market investments.
Both government and retail money market funds try to keep their net asset value (NAV) at $1 per share using a money market fund account. They do this by using different pricing and valuation methods. Institutional prime money market funds must let their NAV fluctuate with the market value of their securities. Unlike bank “money market deposit accounts,” money market funds are not government-guaranteed. You should carefully examine all of the available information about a money market fund, including its prospectus and most current shareholder report, before making an investment.
List of Best Money Market Funds
The list of best money market funds to purchase in 2023 are:
- Vanguard Federal Money Market Fund (ticker: VMFXX)
- Vanguard Municipal Money Market Fund (VMSXX)
- JPMorgan Prime Money Market Fund (VMVXX)
- BlackRock Summit Cash Reserves Fund (MSAXX)
- Fidelity Money Market Fund (SPRXX)
- T. Rowe Price U.S. Treasury Money Fund (PRTXX)
Let us look at them from one to another.
#1. Vanguard Federal Money Market Fund (VMFXX)
VMFXX is among the list of the best money market funds, with an AUM of more than $223 billion. Since its inception in 1981, this fund has endured numerous market declines and downturns. VMFXX currently has an expense ratio of 0.11% and pays a seven-day SEC yield of 4.23%.
#2. Vanguard Municipal Money Market Fund (VMSXX)
VMSXX is another popular alternative to Vanguard. It was founded in 1980 and now has $16.7 billion in assets under management. Investors in higher tax brackets who want a more tax-efficient money market fund may find this fund particularly appealing. The entire portfolio of VMSXX consists of securities protected from federal income taxes. Even though the seven-day SEC yield, at 3%, is lower than VMFXX’s, the investor’s after-tax net return may be higher. VMSXX has no minimum investment requirements and an expense ratio of 0.15%.
#3. Fidelity Money Market Fund (SPRXX)
This is also among the list of the best money market funds. SPRXX is an option for investors who like the platform and fund lineup from Fidelity. As with all money market funds, SPRXX strives for a constant $1 share price, dividend potential, and a combination of liquidity. It holds certificates of deposit, short-term commercial paper, and U.S. Treasury repurchase agreements.
SPRXX has existed since 1989 and has about $6.5 billion in AUM at the moment. The fund currently has a seven-day SEC yield of 4.14%. Although there are no minimum investment restrictions, it does have a marginally greater expense ratio than VMFXX at 0.42%.
#4. T. Rowe Price U.S. Treasury Money Fund (PRTXX)
By placing a strong emphasis on U.S. assets, PRTXX differs from other money market funds by investing in Treasury securities, which are backed by the federal government. These instruments have relatively little default risk, great liquidity, and low interest rate susceptibility.
PRTXX now charges an expense ratio of 0.31% and pays a seven-day SEC yield of 4.02%. AUM for the fund has reached $13.5 billion. Hence, to join the investor class of the fund, you must invest at least $2,500. The I class of the fund has a lower cost ratio of 0.23% for investors with $500,000 or more.
#5. JPMorgan Prime Money Market Fund (VMVXX)
This is also among the list of the best money market funds. Money market investors also enjoy VMVXX, which holds American government and agency assets, corporate bond notes, commercial paper, certificates of deposit, asset-backed securities, and repurchase agreements. Importantly, VMVXX takes ESG, or environmental, social, and governance, considerations into account while selecting its holdings. The fund has generated $66.9 billion in AUM since its launch in 1993. VMVXX presently has a $1,000 minimum investment requirement, pays a seven-day SEC yield of 4.24%, and carries a 0.5% expense ratio.
#6. BlackRock Summit Cash Reserve Fund (MSAXX)
MSAXX, like many other money market funds, holds a variety of U.S. Treasury bills, repurchase agreements, and agency debt in order to keep its share price at $1 and its daily liquidity steady. The fund generally aims to maintain an average dollar-weighted maturity of 60 days or less. MSAXX has only attracted $578 million in AUM, making it less popular than the earlier options. The fund currently has an expense ratio of 0.42% and offers a seven-day SEC yield of 3.73%. However, the required minimum investment is only $1,000.
What Is an Example of a Money Market Fund?
Depending on its mandate, a money market fund might invest in short-term U.S. Treasury securities, notes issued by federal agencies, Eurodollar deposits, repurchase agreements, certificates of deposit, corporate commercial paper, or obligations issued by states, cities, or other municipal agencies.
Is Money Market Fund a Good Investment?
Money market funds make very low-risk investments in short-term debt securities that are incredibly stable. Money market funds are typically regarded as very secure investments, however they do include some risk.
What Is the Point of a Money Market Fund?
A money market fund’s main goal is to give investors a secure means of making modest investments in highly liquid, debt-based securities that are safe and secure.
Can You Withdraw From a Money Market Fund?
Your money market account is open for withdrawal at any time. However, the number of withdrawals you are permitted to make in a particular statement period may be restricted by your bank. Extra withdrawals usually cost money.
What Are the Four Types of Funds?
Money market funds, stock funds, bond funds, and target date funds are the four primary categories into which most mutual funds fit.
What Are the Risks of Money Market Funds?
Money market funds and ultra-short term funds are vulnerable to interest rate risk, liquidity risk, and credit risk since they engage in fixed income assets. The effect of rate changes on the securities held by money market mutual funds is quantified as interest rate risk.
How Much Money Do You Need to Start a Money Market Fund?
The majority of money market accounts have an initial opening deposit range of $500 to $2,500, and many of them have a minimum balance requirement of the same sum in order to avoid fines or maintenance fees.
What is better than a money market fund?
High-yield savings accounts, money market deposit accounts, CDs, bonds, and bond funds are some alternatives to money market mutual funds. Bonds and CDs are effectively loans to an organization in exchange for yield payments.
Is Money Market Safer Than Savings?
Both savings and money market accounts are secure venues for customers to keep their money. Open accounts at institutions that are FDIC-insured, though—this is crucial. Here, you may find out if your bank is FDIC-insured.
Who Should Invest in Money Market Funds?
Saving in a money market fund can make sense for you if you have an expense that you’ll need the funds for in less than three to five years. Money market funds, which invest in liquidity securities with the intention of preserving capital and generating income, are excellent for short-term savings.