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Do you want to earn a higher rate of return on your investment but want to do it in a safe and less risky way? Read on to find out more about money market funds and how they can help you earn a higher rate of return in a low risk way.
What Is a Money Market Fund?
A money market fund is an open-ended mutual fund that invests in short-term debt securities. Money market funds are regarded as being as safe as bank deposits, yet they provide a higher yield. It is a type of fund that is required by law to invest in low-risk securities. These funds have low risks compared to other mutual funds and pay dividends that generally reflect short-term interest rates.
The main difference between money market funds and money market deposit accounts is that money market funds are not insured or guaranteed by the FDIC or any other government agency. Although money market funds seek to preserve the value of your investment at a constant value of $1 per share, it is possible to lose money in a money market fund. Money market funds are regulated primarily under the Investment Company Act of 1940.
Money market funds have the advantage of giving you the flexibility of a checking or savings account, but offer a better investment because of their higher interest rates. It's a relatively safe investment, but you still want to explore your options before putting money into any type of investment.
Types of Money Market Funds
Money market funds typically invest in government securities, certificates of deposit, commercial paper of companies, or other highly liquid and low-risk securities. Here are some examples of money market funds:
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U.S. Treasury funds are one example. These offer lower yields than other types of money market funds, but also offer the lowest risk. If you have a low risk tolerance and don't mind the lower yield, these funds are for you. They are tax exempt.
Another example includes U.S. government and agency funds. These funds are a little riskier than a U.S. Treasury fund, with a slightly higher yield, but not much more. These funds invest in bonds and notes in the Federal government agencies, which are guaranteed by the Treasury and Congress. Some of these funds may invest in foreign securities, emerging market securities and mortgage-related securities. These funds are tax-exempt.
Though not federally insured, money market funds are considered a safe investment. They provide safety and flexibility for the customer but also provide a higher rate of return than a normal savings account. Examples of money market funds include U.S. Treasury funds and U.S. government and agency funds.
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