When you invest in a money market, you are investing in a unique type of mutual fund. Money market mutual funds are designed to yield modest returns while preserving principal. These funds focus on maintaining net asset values (NAVs) of $1.00. Essentially, money market mutual funds are considered, by some, to be along the same lines as high-yield bank accounts. Unlike bank accounts, however, they are not insured against loss.
Understand the Primary Types of Money Market Funds
Understand that prime money market funds invest in commercial paper and Eurodollar deposits, as well as certificates of deposit (CDs). As the performance of these funds is dependent upon their underlying securities, it is imperative to pay attention to their ratings.
Know that government money market funds invest in United States Treasuries or government-agency securities. Interest paid on these funds is exempt from state taxes.
Recognize that tax-exempt money market funds hold national or state municipal bonds. National money market funds are exempt from federal taxes and state funds are exempt from state taxes, as long as you live in the state in question.
Choosing an Investment
Understand that money market funds invest in short-duration instruments. Typically, maturity is reached within a period of 60 days or less. This may vary, but never exceeds 180 days.
Step2
Recognize that money market funds offer check-writing privileges, providing for easy liquidity.
Consider the role money market funds may play in your investment plans. Generally, they are used for putting aside emergency money, saving for shorter-term goals and diversifying more conservative investment portfolios.
Keep in mind that you can lose money with a money market fund in the event that poor interest rate and securities choices are made and the NAV falls below $1.00.
Realize that money market funds can quickly add money in the event of a fall in the NAV. This ability reduces some of the already small risk of losing the money you invest.
Invest in a money market fund through your broker or financial adviser or contact the fund of your choice directly.
- Investors who are required to pay federal alternative minimum taxes may be required to pay taxes on a portion of their tax-exempt money market income.
- Be wary of money market funds that are offering much higher yields than other funds with the same or similar holdings. These funds may waive operating costs temporarily, attempting to attract investors. Eventually, this may stop, leading to lower yields.
No comments:
Post a Comment