Define Money Market Funds
If you are looking to define money market funds, then one can say that these are a kind of mutual funds that invest in low risk securities. Compared to other mutual funds, money market funds have lower risks involved and they pay out dividends to investors based on short term interest rates. |
Usually a money market fund invests in CDs, government securities or commercial documents of companies. The idea is to invest the money into securities that have low risk and at the same time maintain the liquidity of the investment. In addition, money market funds try to ensure that NAV stays at around $1 per share while the yield rises or decreases based on the market's performance. So, it is quite possible for an investor to lose money when he invests in a money market fund, but the instances of losses are quite rare.
While money market funds offer low risk investments, they are not insured by the federal government. Also, the dividends paid out by the funds are completely taxable.
Before an investor invests in a money market fund, he should make sure that he checks out the management fees levied by the fund. This is usually reported as expense ratio and can range from 0.10 percent to 0.50 percent. It has been seen that funds which have lower management fees do better than money market funds that have higher fees. In addition, an investor should read the prospectus of the fund carefully to figure out all the rules. The fund should invest just in debt securities that are rated high. Also, it is imperative that the fund has cash reserves to pay a shareholder when he is selling his shares.
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