In the current day, money market funding has become very popular among investors, which can be attributed to their relative stability. You should not be too hasty to invest in them though, as they can come with some disadvantages. In this article, we will guide you through how money market funds function.
Money market funding that invests mainly in cash and cash equivalents. They deal mainly in short-term investments with liquid assets. These may include Certificates of Deposits (CDs), Commercial Papers, US Treasuries, Bankers’ Acceptances and Repurchase Agreements.
Money Market Accounts
Another option for you to choose for investment is a money market account, which differs from money market funds. Fund companies advocate money market funds, although they carry no guarantee of returns of your original investment. Money market accounts, however, are savings accounts offered by financial institutions, thus come with greater security. However, they are restricted in their options for transactions and rely on the Federal Deposit Insurance Corporation (FDIC).
Money market accounts also limit the number of times an individual can access an account and relies on writings checks. A bank may allow up to only six withdrawals per statement cycle for a money market account. This is in contrast with money market funds, as they will allow an individual to access their account whenever they so choose.
Advantages of Money Market Funds
The advantage of money market funds is that they are risk-averse, at least in comparison to stocks and bonds. They have an interest in lower-risk investments; short-term commercial papers, certificates of deposit (CDs), and T-bills.
The minimum investment prices required for Money markets tend to be somewhat large, which restricts the vast majority of retail investors from considering them. The funds have lower prices, however, which means a much larger number of investors have access to them.
Brokerage firms can deal with money market funds to help their clients by using them for cash management. They can transfer one extra percentage point for annual returns than other possible investments would to their clients.
Disadvantages of Money Market Funds
Firstly, large rises in inflation relative to the return in your money market account may result in you losing purchasing power.
The funds usually require small fees annually, which could potentially gather into a very large sum and result in losses in profits. This could most definitely be the result if your earnings are only up to 2 or 3 percent. This effect can be magnified with inflation.
The FDIC tends to insure a money fund up to $100,000 per investor. They are, however, unlikely to permit this kind of insurance to a money market fund.
So, money market funds are generally used to deposit your money in them if you do not know where else to invest yet.
Generally, the return of these funds is only slightly higher than the inflation rate, and they are very low-stakes investments. They are not great long-term investments, for a retirement fund for example. They are best used as short-term investments for depositing your funds before finding better long-term solutions.