Money market mutual funds, also known as money market funds, are fixed-income mutual funds that invest in high-quality, short-term debt. They are considered one of the safest investments you can make.
Similar to how other mutual funds work, money market investors buy shares in a fund, which in turn buys short-term government, bank or corporate debt, such as U.S. Treasuries, certificates of deposit or commercial paper. Money market funds are popular because they can quickly be turned into cash or used to fund a new investment opportunity.
Why invest in money market funds?
Money market funds are considered a good place to park cash, because they're much less volatile than the stock or bond markets.
Money market funds are used by investors who want to protect rather than grow their retirement savings, but still earn some interest — somewhere between 1% and 3% a year. That’s about on par or slightly higher than bank savings or money market accounts.
“Money market funds are used by investors who want to protect rather than grow their retirement savings, but still earn some interest”
They are cost effective because, unlike many mutual funds, they have no fees when your cash joins or leaves the fund. There also can be tax benefits, as some money market funds hold municipal securities that are exempt from federal and state taxes.
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What’s the downside of money market funds?
The low returns mean money market funds aren’t a great tool for building long-term retirement savings. The younger the investor, the more a portfolio should contain equity mutual funds, which are riskier but also have the potential for double-digit annual returns. Money market funds often are best used when you’re already at or near your retirement goals.
“Don’t confuse money market funds with money market accounts, which are bank savings accounts.”
Also, don’t confuse money market funds with money market accounts, which are bank savings accounts. Money market fund deposits are not protected, while money market accounts are backed up to $250,000 per depositor by the Federal Deposit Insurance Corp. at banks and the National Credit Union Administration at credit unions.
Like all investments, money market funds carry a risk of losing value. Still, money market funds are widely considered a safe alternative to bank deposits because federal laws require funds to hold only high-quality, short-term debt.
How to buy money market mutual funds
You can purchase from a fund provider such as Vanguard or Fidelity Investments, or directly from a bank. Both options, however, may limit your choices of funds.
You’ll have more choices if you open a brokerage account to begin investing. Minimum deposits for money market funds can range from $500 to $5,000 or more, but some providers offer a $0 minimum if you invest through an individual retirement account such as a traditional or Roth IRA, or if you set up automatic monthly deposits.
» Learn more: Understand how to invest with index funds.