Investing Unit 5: Money Market Mutual Funds

January 11, 2010 Print Friendly and PDF




Money market mutual funds are a type of mutual fund consisting of high quality, short-term debt instruments such as Treasury bills and short term corporate IOUs. Like all mutual funds, money market mutual fund (MMMF) portfolios are professionally managed and a management fee is charged against fund assets to cover this expense. MMMFs offer market-based rates and are quick to respond to changing conditions because the average maturity of securities in their portfolio is 90 days or less. The minimum initial deposit is set by individual investment firms and can range from $250 to $25,000. MMMFs can be purchased directly from investment companies or with the assistance of financial advisors.

Unlike bank-sponsored money market deposit accounts (MMDAs), there is generally no FDIC insurance if a MMMF fails to maintain a $1 share price unless the government decides to temporarily provide insurance, as it did after the 2008 financial crisis. Failures have happened very infrequently in the last 30 or so years (since MMMFs were developed), however, and most investment firms have shored up MMMF prices with other company assets to avoid a loss of principal by investors. Limited check writing is generally available on MMMFs with a minimum amount (e.g., $250) per check. Investors seeking both safety of principal and tax advantages can select tax-exempt MMMFs that include short-term securities issued by state and local governments. Other conservative choices are MMMFs that invest solely in Treasury bills and/or Treasuries plus debt of federal government agencies.

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This work is supported by the USDA National Institute of Food and Agriculture, New Technologies for Ag Extension project.