Money Market Funds
What are money market Funds?
There are a lot of pros and cons to be aware of when it comes to money market funds.
In this article, we'll take a look at these ups and downs.
An Overview Money market investment is a low single-digit return.
When compared to stocks or corporate debt, the risk to principal is generally quite very low.
However, investors need to weigh a number of pros and cons.
The downs can easily surpass the ups.
First, let's consider the advantages of putting your money in a money market account.
When the stock market is extremely volatile and investors aren't sure where to invest their money, the money market can be a great safe haven.
Why should you invest in money markets?
As mentioned above, money market accounts and funds are often considered to have less risk than their stock and bond counterparts.
That's because these types of funds typically often invest in low-risk vehicles such as certificates of , deposit, Treasury bills and short-term commercial paper.
In addition, the money market often generates a low single-digit return for investors, which can still be quite attractive. very attractive in a down market.
Liquidity isn't Usually an issue Money market funds don't invest in minuscule volumes or tend to have little follow.
They usually trade in entities and/or securities that are very high demand (such as T-bills).
This means they tend to be more liquid; investors can buy and sell them easily.
In some cases, these shares may be very liquid, but for most the audience is probably very limited.
This means that getting into and out of such investment could be difficult if the market was in a tailspin.
What are the cons of money market?
Let's talk about the disadvantages of having your funds in a money market account Now let's talk about the disadvantages of having your funds in a money market account.
If an investor is generating a 3% return in their bank account, but inflation is humming along at 4%, the investor is essentially losing his purchasing power every year.
When investors are earning 2% or 3% in a bank account, even small annual fees can eat up a substantial chunk of the profit.
This may make it even harder for money market investors to keep pace with inflation.
Fees can vary in their negative impact on the return of the account or fund.
Funds purchased at a bank are usually insured by the Federal Deposit Insurance Corporation (FDIC) for up to $250,000 per depositor.
However, money market mutual funds aren't usually government-insured.
This means that although money market mutual funds are considered a comparatively safe place to invest money, there is still an element of risk that all investors should be aware of.
If an investor was to maintain a $20,000 bank account with a bank and the bank went belly up, the investor would likely be made whole again by this insurance insurance.
Conversely, if a fund did the same thing, the investor might not be made whole again—at least not by the federal government.
While money market funds often invest in government securities and other vehicles that are considered safe, they may also take risks to obtain higher yields for their investors.
For example, to capture another tenth of a percentage point of return, the fund may invest in bonds or commercial paper that carry additional risk.
The point is that investing in the highest-yielding money market fund may not always be the smartest idea.
Remember, the return a fund has posted in a previous year isn't necessarily an indication of what it might generate in a future year.
It's also important to note that the alternative to the money market may not be desirable in some markets.
For example, having dividends or proceeds from a stock sale sent directly to you may not allow you to capture the same rate of return.
In addition, reinvesting dividends in equities can only exacerbate the return problems in a down market.
Over time, common stocks have returned about 8% to 10% on average, including recessionary periods.
By investing in a money market mutual fund, which often yields only 2% or 3%, the investor may miss the opportunity for a better rate of return.
This can have a huge impact on an individual's ability to build wealth.
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