What is a Money Market Fund?

by | Jun 4, 2014 | Asset Management, Podcasts

Do you know what it means when a portion of your account is in the money market? A lot of investors don’t and feel silly asking. The funny part is that many people in the financial industry probably don’t completely understand either. Tom and Brendan explain the money market in this week’s Mullooly Asset Management podcast. You’ll learn what a money market fund is and what they’re made of.

When you have money in the money market you actually own shares of a mutual fund. This fact surprises a lot of people. If you have $2500 in the money market, you actually own 2500 shares of a money market mutual fund. Each fund creates literally millions of shares. This waters down the price per share so that each share is almost always worth $1. Many places also offer FDIC-backed money market mutual funds. There’s always the possibility that we could “break the buck” (like in 2008), but the odds of that are slim. However, we will discuss “breaking the buck” in an upcoming video that you should all check out!

Investors are often confused when they receive a prospectus upon putting money into a money market fund. Like we stated previously, these are technically mutual funds. Mutual funds are sold by prospectus only, so you should be receiving one when putting any amount of money into a money market fund.

Many advisors, brokers, and other members of the financial industry refer to the money market as “cash”. This definitely contributes to investor confusion. The terms are used interchangably although you aren’t actually in cash. This mainly has to do with the liquidity of money market mutual funds. Your assets can easily be converted to a check, invested, or otherwise moved in one day. Currently money market funds earn close to 0% for investors, the same as cash in your pocket. So be aware that when a portion of your account is in “cash”, more likely than not that really means it’s in a money market fund.

Money market mutual funds are made up of securities such as treasury bills, negotiable CDs, and commericial paper. The weighted average maturity of the money market fund’s holdings must be less than 60 days. They must also offer minimal credit risk and have at least 95% of the its total assets rated in the top two categories by a NRSRO (Nationally Rated Statistical Rating Organization). This helps to ensure the fund’s liquidity and safety.

You can learn more about money market funds by visiting this informational page provided by the SEC: (http://www.sec.gov/answers/mfmmkt.htm)

Make sure you listen to this week’s podcast to hear the entire conversation Tom and Brendan have regarding money market mutual funds.

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