Investing 101: Money Market Funds
If you’ve followed financial news, you’ve likely seen headlines about money market funds. In the US, combined assets in these funds reached a record high of more than $5 trillion in March.
As a type of mutual fund, a money market fund pools dollars from investors—who own shares of the fund—and purchases financial instruments. Investors can buy shares in a money market fund either through a brokerage or directly from the fund’s provider.
For many Americans, money market funds are an attractive place to park cash. The funds generate investment returns—or yield—through holdings of short-term, highly rated debt—such as US Treasury bills, municipal notes, or corporate securities, depending on the type of fund. They are also professionally managed with a focus on maintaining shareholders’ capital and a high degree of ease in converting holdings to cash. Because of their conservative investment strategy and strict regulation, money market funds are considered to be among the safest investment vehicles.
Money market funds normally offer higher returns than bank savings accounts and more flexibility than certificates of deposit. These features have helped make them a popular tool to build toward a down payment, bolster emergency savings, and achieve other short-term financial goals. Additionally, yields available through these funds have increased over the past year in accordance with rising interest rates, fueling greater demand.
Money market funds have helped many Americans achieve financial security while providing critical financing to the public and private sectors. For those reasons, they represent one of the greatest innovations in financial history.
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