Money Market Funds

Money market funds are safe investments that many investors like to make. Even those who are not heavily into investing like the money market fund because of its low risk. They more or less make for a great way to save money.

The main goal of money market funds is to hold a net asset value of $1 per share while gaining interest income off of the money in the account, not including broker commissions. This is why the money market is a way to save money while investing with minimal risk.

The Return

One question that many have about money market funds is whether or not they pay. The investment itself is very liquid and considered to be a short-term option. The credit quality is high, though, and can consist of other investments such as U.S. Treasuries, Certificates of Deposit, repurchase agreements, commercial paper, and bankers' acceptances. The average maturity of money market funds are 90 days and the SEC oversees this.

The SEC oversees a lot in regards to money market funds. The SEC has a set of guidelines that must be followed. That way investors are protected and the funds can keep their low risk. This and a mutual fund is rather similar.

As for what makes money market funds so special, they are safe. This is one of the most stable investments that you can make. The return is fixed with maturities that are short. The return tends to be reasonable, while carrying a low default risk.

The initial investment is also low. Money market securities themselves have a tendency to have a large initial investment, but money market funds are the opposite. The investment is much lower than the average requirements for a mutual fund. They are also quite accessible. This means that the funds can be bought and sold whenever you want.

The accessibility ensures that you are not subject to any timing restrictions that may exist. You may even have check writing privileges for instant access to your money. This gives you some spending power if you are in need of money or do not want to spend money from any other accounts that you have.

Taxes

You have taxable and tax-free categories that apply to money market funds. If your fund invests in Treasury securities, repurchase agreements, government agency securities, CDs, bankers' acceptances, or commercial paper, then you are dealing with a taxable fund. But if you prefer the tax-free option, then you won't have as many options.

The investments that tax-free funds invest in are short-term debt obligations. These obligations are issued by tax exempt entities that are federally exempt. Their yield is also lower. You may want to check on the details before purchasing a tax-free fund because of the fact that you could exempt yourself from both state and federal taxes. Exempting from both is out of the norm.

If you are trying to decide whether to purchase taxed or tax-free, you want to weigh the cost of taxes against the return that you can expect. In other words, you need to weigh the tax benefits of a tax-free account against the low returns. You must then weigh the taxes you'll spend on a taxable account against the higher returns. That's how you'll figure out which is best for you.

Of course, what you choose to do depends on how much you have to invest to begin with. Smaller amounts will have smaller yields, but the taxes on income earned will be lower as well. Talk with your certified financial advisor to choose the best investment route for you.

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