Basic Information About Money Market Mutual Funds

Written by William James

Mutual funds of any type do not offer a fixed-rate of return on your investment. Mutual funds, including money market mutual fund prices can go up and down every day and depending on where you buy in and where you sell your return on investment will fluctuate. Even if the money market mutual funds are sold by a bank, these funds are not insured by the FDIC like CD’s or savings accounts.

Understand What You Are Buying

A money market mutual fund may look like a savings account. They often come with check books or ATM cards for easy access and you may be purchasing your account from a bank. But this is not a savings account or a CD or a money market account. This is a mutual fund. The product is not insured, you don’t get a guaranteed rate of return, nor is your principle secure.

It is important to understand this because some banks will lump these funds in with other “savings” options on a marketing brochure and not spell out the differences. Make sure if you are looking at “money market” options that you know if you are looking at an interest bearing, insured, money market account…or if you are looking at a money market mutual fund account which may pay a higher rate of return, but also has more risk associated with it.

Don’t Choose the First Money Market Mutual Fund You Find

Do your comparison shopping on mutual funds. Read the prospectus and ask lots of questions for those you are interested in. There are literally close to a thousand different money market mutual funds available.

These funds are all run by different companies and all have different goals and risk thresholds. They all have different fees and histories. Narrow the field down by asking questions and checking out any comments about the fund from different sources. It is important to read the prospectus of the fund and to ask for a Statement of Additional Information from the company.

If you don’t understand specific terms or any abbreviations in the information provided, make sure you get everything explained. If the investment company doesn’t seem willing to explain the information or make you feel comfortable with their answers then they probably aren’t the place you want to invest your money.

Money Market Mutual Fund Fees

With so many different options and different places to invest your money in money market mutual funds, you will find that the fees and the way fees are charged—vary greatly.

Make sure you understand what all the charges and fees are that apply to the mutual fund you choose. This will mean that you need to understand the terminology that goes with those fees. Here is a sample of the fees or charges that might apply to your money market mutual fund:

Front-end loads – This is usually a percentage fee that is charged at the “front-end” or when you purchase the fund.
Back-end loads – This percentage fee is charged at the “back-end” or when you sell or cash out your money market mutual fund.
No-load funds – These are mutual funds that don’t charge the Front or Back –end load fees when you buy or sell a mutual fund. But they often charge a set management fee so make sure ALL the fees are spelled out in advance.
Breakpoint Selling – There are many mutual funds who will reduce the load percentages or the sales charge after you invest a specific dollar amount. For instance you pay the fees if you invest $3000, but don’t pay the fees if you invest $5,000. $5000 is the breakpoint. This is just an example. Make sure you understand what the breakpoint is for any money market mutual funds that you are considering. This information is generally listed in the fund’s prospectus under Sales Charge.

Money Market Mutual Fund Summary

There are other types of mutual funds. Some mutual funds invest in stocks or bonds, not money markets. If you compare money market mutual funds to these other types of mutual funds you will find that the money market funds are comparatively low risk.

Ordered by federal regulation to only invest in high quality, short-term investments, the money market fund is less likely to crash with the stock market. You earn your money because the money market fund earns a fluctuating interest rate on the money deposited. This money is based on how well the fund is run and the types of securities they’ve purchased.

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