The fundamentals of money market funds: 2022 edition
When it comes to investing, the basics are often the most important. A good understanding of money market funds can help you make better decisions about your investments. This blog will walk you through what they are, how they work, and why they're essential.
Table of Contents
What is a money market fund?
It is a type of mutual fund. Generally, it stores cash and invests in higher-ranked securities with stable value. Money market funds are low-risk, low-return investments—they're designed for investors who want to make sure they'll have enough money at all times while still being able to access their investment at any time by withdrawing it into cash or exchanging its dollar value into another form of currency when needed.
Money market funds also offer diversification benefits because they invest in different types of securities rather than just one type, as most stocks do; therefore, they balance out fluctuations in the market by providing support with other holdings instead.
Money market fund uses
Unlike other types of funds, money market funds do not invest in long-term bonds or other high-yield investments. Instead, they focus on holding cash and checking accounts like savings accounts at banks and credit unions.
Money market funds preserve capital for investors who want access to their money quickly but don't have time or desire to wait for interest with longer maturities (i.e., one year). They also offer low fees. They don't need management fees because they only hold cash—no stocks or bonds are needed!
Restrictions for money market funds
The SEC regulates money market funds in the U.S. This regulatory body establishes the standards for the qualities, level of maturity, and range of permitted investments in a money market fund.
The provisions require a money fund to invest primarily in the best-rated debt instruments, and these instruments must have a maturity of fewer than 13 months. The weighted average maturity (WAM) period for the money market fund portfolio must be 60 days or less.
Know the basics before getting started with a money market fund.
- Know what a money market fund is and how they work.
- Be aware of the risks involved with investing in money market funds, including potential losses.
- If you have a problem with your money market fund, you must contact your financial institution immediately so that they can assist in rectifying any issues relating to their products or services (e.g., selling securities).
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