What is a Money Market Fund?
A money market fund is a mutual fund with investments in high-yield money market instruments such as federal securities, CDs, and commercial paper. The intent is to make such instruments (normally purchased in large denominations by institutions) available indirectly to individuals.
Are Money Market Funds a Safe Investment?
Money markets are relatively safe because money in these accounts is invested in low-risk, short-term securities. Money market funds are still susceptible to volatility and although it may be lower than other vehicles, there is still some risk involved.
How Does a Money Market Fund Work?
A money market fund works similarly to any other mutual funds. The fund pools money from many individuals and invests in short-term debt securities and cash equivalents. Returns on these investments depend on market interest rates.
Although money market funds are technically investments, they act more like bank cash accounts since the money is highly-liquid.
These funds do not typically offer as high of a return as investing in the stock market, but they carry much less risk than stocks, and higher returns than a savings account.
Can you Lose Money in a Money Market Fund?
Although the risk is low, there is a possibility that you’ll lose money in a money market fund. Despite this, a money market fund is a generally safe and a good short-term place to keep money you’d like to be liquid and accessible.
Money Market Fund vs. Savings Account
Money Market Funds tend to have higher minimum deposits or balance requirements than savings accounts. They can also yield higher returns than a savings account. While considered low risk, they are still an investment vehicle and not entirely risk-free, as opposed to a bank product like a savings account.
Savings accounts are bank products. You earn a fixed interest over time on the money you put in. Savings accounts tend to pay a lower interest rate than money market funds but are risk-free and FDIC-insured.