Mutual Funds

Money Market Mutual Funds*

Money market mutual funds hold short-term financial instruments like U.S. Treasury bills, CDs, and the short-term debt of U.S. corporations, called commercial paper. The funds have a stated net asset value of $1.00 per share, and most offer check-writing privileges. They are instantly liquid. You don't have to wait for them to mature—you just write a check. The objective of a money market fund is to keep the value of a dollar constant while paying you some interest.

Money markets can be for:

  1. Emergency money
  2. Savings for short- and intermediate-term goals
  3. Providing diversity in the portfolio of a conservative investor

*An investment in the fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the Fund.

There are three basic types of money market funds:

  • Prime funds, which own commercial paper, CDs, and Eurodollar deposits. These are only as good as their underlying securities. Only buy funds owning the highest quality securities (AAA, Standard & Poor's, Moody's).
  • Government funds, which own either U.S. Treasuries or federal agency securities. The underlying securities carry the backing of the U.S. Government (not the fund itself), but the backing is "explicit" (stated) in the case of Treasuries, and "implicit" (assumed) in the case of agency bonds. You do not have to pay state taxes on the interest you receive.
  • Tax-exempt funds, which hold either municipal bonds from all over the country (national) or from just one state. National funds are generally exempt from federal taxes but may be subject to the Alternative Minimum Tax (AMT). State funds are exempt from state taxes as well if you live in the state. Look at funds containing the highest-grade issues with average rating by Moody's of at least MIG-1.

 

IMPORTANT NOTE: When researching money market funds, you may notice that some funds have a yield (interest rate after expenses are subtracted) much higher than others holding the same kinds of securities. This is typically because the funds are either new or trying to attract more investors. Read the fine print! If the fund says that it is "temporarily absorbing operating expenses," then these higher yields are bound to go away.

You may be trying to decide on whether to choose a taxable or tax-exempt fund. See the section Liquidity Needs and refer to the "after-tax return chart" to help you. Take your federal marginal tax rate and the interest rate your taxable money market fund pays you. Follow the lines across and down to find your after-tax return. If you can do better than the after-tax return in a tax-exempt fund, use it. If not, stay in a taxable fund.

*An investment in the fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the Fund.

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