Money Market Mutual Funds

Benefits to Money Market Mutual Funds

One of the most important benefits to a Money Market Mutual Fund is that it is diversified. This means that they are made up of many different investments. Having different investments can lower your risk factor because you avoid having all your money tied up in one place.

Another benefit is that money market mutual funds are managed by a professional. This means that you don’t have to keep track of everything yourself and you can just buy into the funds and just forget about it. The fund manager is paid based on how well the money market mutual fund performs and the managing of the fund is their full time job.

Open-ended Versus Closed-ended

If you are considering investing in money market mutual funds, one of the first decisions you will need to make is if you want an open-ended or closed-ended fund. An open-ended fund means that shares can be bought or sold from the fund at any time.

A closed-ended fund means that there are only a specific number of shares that can be issued within it and these shares can only be sold back to the fund when the fund closes or is terminated. There is a secondary market that allows you to sell closed-ended funs to other investors.

Understanding What Load Means In Reference To Money Market Mutual Funds

When you purchase a money market mutual fund you can be charged a service or sales fees to buy the fund. These fees are called load charges and are looked at as a commission or research fees. The load is paid out to the fund salesperson.

Load fees and charges vary, but they can add up to as much as 8.5 percent of the selling price of the shares you buy in the fund. These fees can be charged in several different ways. A front-end load means that you pay the charges at the time you purchase the mutual fund. A back-end load means you pay the charges at the time that you sell your shares.

There are also no-load money market mutual funds. As expected, a no-load fund means that there are not charges made for sales fees. This type of money market mutual fund is marketed directly, without a sales person. You can buy them simply by doing a little research yourself.

The last type of money market mutual fund account is a low-load fund. This means that the fund can only charge up to a 3.5 percent sales fee versus the 8.5 percent of the others. It is important to understand the associated fees when you choose your money market mutual fund and take these costs into consideration when you are comparing the different funds. 

Additional Benefits

Often money market mutual funds have free checks or come with an ATM card. This allows you to easily access your money. Your investment is liquid, yet the rate of return is usually higher than in a savings account. There aren’t early withdrawal penalties like you might get with a CD.

Because money market mutual funds have to invest 95% of their assets in what is called first-tier securities, they are considered to be very safe investments. A first-tier security is something like a government T-Bill or private paper issued by a top-rated institution.

Another advantage to a money market mutual fund is that investors are allowed to link up their money market fund accounts with any stock or bond fund accounts. This means that any interest or dividends that are earned on the stock or bond accounts can be deposited immediately into the money market fund account. This means that earnings can be generated immediately on this new money.

The money market mutual fund account is often used by investors to “park” funds generated from the sale of stocks or bonds. They utilize the money market fund as a holding area once a stock or bond is sold until they figure out what else to buy.