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Are Money Market Funds For You?

By Staff
Money market funds (not to be confused with money market “accounts”) are short-term investments that are offered by brokers or mutual fund companies. They generally have a higher rate of return than money market accounts but also come with more risk.

Recently, these investment options have been called into question regarding stability because the collapse of Lehman Brothers caused the Reserve Primary Fund to “break the buck.” While this may not mean much to a beginning investor, in 2008, it actually translated into a three-cent per share loss and a large run on the fund. To prevent this from happening again, the U.S. Treasury created a guarantee program that will cover cash invested in the past year in such funds, which are not usually insured.  The program will run through September 18, 2009

Money market funds are invested conservatively in government securities and short-term notes from corporations. As a result, they tend to be considered stable in nature.  Because they are regulated by the SEC (Securities and Exchange Commission) Act of 1940, they are classified as low to medium-risk. The Act requires that the portfolio maintain a Weighted Average Maturity (WAM) of 90 days or less. It also states that the investment must be evenly distributed, with no more than 5% devoted to any one issuer. This diversity helps to stabilize returns for investors, even over short periods like 12 months.

There are several factors to consider before investing in any money market fund. These funds are not FDIC-insured (except in times of government intervention), which means that you can lose your entire investment without recourse if your brokerage fund goes under. And, in these times, this is a real issue to consider for many people who simply can’t afford to lose anymore. Further, money market funds also bear the possibility of losing money over time. So, if you’re a more conservative investor, you may want to think twice before choosing this type of investment. Finally, market funds are usually not great for the long-term investor, simply because they won’t yield a high enough return to merit long-term commitment.

Use’s money market rate comparison tool to find out which options might be best for your financial situation. The tool allows you to search for local or regional rates, as well as national figures to find out how to get the most for your money. If you are a newcomer, you can also research alternative ways to find the best funds available on the market today.

The key to smart investing is to educate yourself on all available options, even if you are working with an experienced broker.

In the end, money market funds are best utilized as just one part of a larger, diversified investment portfolio.

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