Money Market Mutual Fund Rates / Money Market Fund Rates
The money market refers to a collection of transactions undertaken by banks and firms who are engaged in short term lending up to 13 months. The financial instruments involved are varied, such as repurchase agreements, commercial paper, and treasury bills. Individual investors do not participate in the money market directly, but large institutional investing companies like Fidelity or Vanguard can set up money market funds, or money market mutual funds are they are sometimes known, where investors can pool their money to partake of these financial instruments.
FDIC Insurance
While money market mutual fund rates are driven entirely by securities in very low risk investments, one thing that many investors should be aware of is that these instruments are not federally insured, unlike bank certificate of deposits, savings accounts etc. This is not unusual, as most profit-making investment vehicles are not subject to FDIC insurance. A money market fund should not be confused with the highly similar money market deposit account.
Dependable with High NAV
Individual money market instruments are often tracked via a metric known as "Net Asset Value" or NAV. It is a measurement of its current value relative to its starting value. The seller goes to great lengths to keep this ratio at 1.00 or higher, such that there is little or no chance of loss for the buyer. The fluctuation in money market fund return comes almost entirely from its "yield", or effectively the interest that is paid out by the seller at the end of term of the financial instrument. There have been a few failures in recent recorded financial history of money market investments going sour with investors losing more than they gain, but even these losses have been limited to 4-5% points. The general consensus is that money markets are highly dependable with very low risk of default. In turn, money market mutual fund rates are all generally positive
indicating a return for the investors.
Tax Implications
There are two classifications that affect the money market mutual fund rates: taxable and tax-free. The investor will notice that the taxable funds generally have slightly higher rates, whereas the tax-free ones have lower rates. But there is no hard and fast rule which one to invest in. It is true that taxable funds will pay greater yields, but to calculate whether this is good for an individual investor in the long run, one needs to calculate after taxation whether this greater yield will be profitable compared to the tax-free or nontaxable fund. The reason is because income tax rates vary between individuals, complicated by gradation in income, deduction status, business expenses, etc.
Liquidity of Your Investment
There are some benefits of high "liquidity" associated with such funds. Most investments like mutual funds or bonds are tied up or require a few days before the money can be accessible after notification to the holding company. With money market funds, one can write checks and make transfers electronically. So even though money market mutual fund rates may be lower than regular mutual funds, it is as easy as writing a check to get access to the investor's money.
Evaluating Money Market Funds
First compare them with canonical mutual fund rates and the corresponding highest money market rates. Then continue your investigation of money market fund rates not only by reading the prospectus of the fund, but also the manager history, the company that is managing the fund, and the history of the fund in terms of its investments, yield, and fees. These fees could be couched in terms like "expense ratio", which is usually already factored in for calculating the yield of the fund. A lot of this information can be found in the fund "profile". Some companies also issue a regular report of earnings or investments in the fund known as the "shareholder report".