Money market funds are easy to learn about - we'll go over the basic information in this article, but if you'd like to learn even more you can take some online classes. Selecting a money market fund is a decision that an investor should take seriously. Money market funds are different from a regular mutual fund in that the share price is always $1.00. The rate of return on money market funds can vary greatly. They offer the greatest amount of liquidity, or ability to get your money back quickly, than any other asset class.
Although the money market fund maintains a $1.00 NAV, there are several options to consider. In order to select the best money market fund you need to asses the different levels of risk.
The least risky is a money market fund that states US Government in the title. These funds invest solely in securities backed by the US government. The holdings will consist of treasury bills, agency discount notes, and possibly short notes. The rate of return of this kind of money market fund will be less than its counterparts, but it guarantees the principal. This is the kind of money market you should select if the preservation of principal is of the utmost importance to you.
Another kind of money market fund you can select is a Prime Money Market fund. These types of funds invest in assets such as commercial paper in order to enhance the yield. Although commercial paper always matures in less than 270 days, there is still the possibility of default, or the potential for the assets securing the commercial paper to be devalued. These types of investments yield more than their US Government counterparts, but also offer a significantly higher risk. This investment is appropriate if you are looking for an enhanced return but still need the liquidity of a money market fund.
The most risky money market fund would be Trust. These types of commingled funds behave the way a mutual fund does, however they are not registered with the SEC. Because of the lack of registration, they can invest in any kind of short investment vehicle. Money market trusts can and do engage in risky investment activities such as securities lending, reverse repos, derivatives hedging, and investing in other alternative investments. These types of investments are advisable if you have a great deal of diversity in your portfolio.
Finally, it is important to note whether your financial institution offers you a choice in selecting a money market fund. Offering only one choice for your money market holdings should be considered an area of concern for the investor.
Other excellent tips and techniques can be learned through online classes.