Part 1: What is a Money Market Fund, Different Types, When to Use It
Part 2: Money Market Funds: Pros and Cons
Introduction to a Money Market Fund for Kids and Teens
This video explains the concept of a money market fund in a simple, concise way for kids and beginners. It could be used by kids & teens to learn about money market funds, or used as a money & personal finance resource by parents and teachers as part of a Financial Literacy course or K-12 curriculum.
Suitable for students from grade levels:
- Middle School
- High School
The topics covered are:
- What is a money market fund
- Different types of money market funds
- When should you use a money market fund
- Advantages of money market funds
- Disadvantages of money market funds
What is a money market fund?
A money market fund or MMF, also called money market mutual fund, is a type of fixed income mutual fund.
It invests in very low-risk, highly liquid, short-term debt securities like government bonds, municipal bonds and investment grade corporate bonds, as well as cash and cash equivalents like Certificate of Deposit (CDs).
It also pays some interest, which could be taxable or tax-exempt depending on its portfolio.
Like any other mutual fund, investors can buy or redeem shares of MMFs through mutual fund companies, brokerages or banks.
MMFs usually require a minimum deposit, but some providers waive this minimum if you invest through an IRA, or if you set up automatic monthly deposits.
Are there different types of money market funds?
Based on the types of investments in their portfolio, MMFs can be broadly classified into 3 types.
Government money market funds invest in short-term government treasuries, like T-bonds, T-bills and T-notes that are backed by the government. They can also invest in repurchase agreements backed by government securities.
Prime money market funds invest in short term, highly rated debt issued by corporations, like bonds, commercial paper and corporate notes.
Municipal money market funds invest primarily in municipal bonds or munis, and their earnings are usually tax exempt.
Another way of classifying money market funds is based on their target investors.
Retail money market funds are meant for individual investors, whereas institutional money market funds are meant for institutional investors and require high minimum investments.
When should I use a MMF?
Money market funds aim to provide a safe place for investors to park their money in the near term, by offering them high liquidity with very low risk.
So they are an ideal choice for someone in or near retirement looking for a safer avenue, for a conservative investor wanting to protect their nest egg, or for someone parking their money for a short term goal like building an emergency fund, paying for a wedding or buying a car.
It’s also a good place to keep your money if you are still weighing your investment options so you can be ready to invest when the right opportunity arises.
What are the advantages of money market funds?
Money market funds are one of the lowest-risk, most liquid and least volatile investments, offering investors safety, liquidity and stability for their savings in the short term.
In addition, they help investors achieve diversification while getting a slightly higher return than cash in a standard checking or savings account.
MMFs don’t have entry or exit loads that are typical to other mutual funds, making them an attractive option to investors.
MMFs investing in municipal securities also offer tax advantages as they are usually exempt from federal income tax and sometimes also from state income tax!
Are there any disadvantages?
Since money market funds are mutual funds, they are not FDIC or NCUA insured. This means there is not only no guarantee of earnings, but there is also a chance you could lose your original investment.
In addition, MMFs give lower returns than other riskier investments. The lack of capital appreciation makes them unsuitable for long term investments like retirement planning or college education.
Since the interest payment is tied to the performance of the underlying investments, any economic or political downturns can have an adverse impact.
Also, since the share price of the MMF fluctuates, when you sell your shares they might be worth less than what you bought them for.
MMFs also charge fees, which can add up and eat into your earnings given their already low returns.
What’s the difference between money market funds and money market accounts?
That’s an excellent question Sooper Cooper. But that’s a topic for another time.