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Since interest rates have risen over the past two years, money market funds have become more attractive to investors. Money market funds, which invest in short-term, safe securities, are mutual funds that closely track the Federal Reserve’s benchmark interest rate. Interest rates are at the highest levels in more than 20 years, with some money market funds yielding about 5%.
Before you invest, let’s break down what you need to know to decide if investing is right for you.
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Headquartered in Greenwich, Conn., Interactive Brokers has been around for 46 years and offers clients a wide range of investment assets including stocks, options, futures, mutual funds, bonds and more.
This brokerage is suitable for traders who want to choose from a wide range of assets. Interactive Brokers offers an extensive product list compared to other online brokerages we’ve reviewed, and with a $0 account minimum and low stock trading fees, the barrier to entry is low. We also offer margin trading and several educational resources in the form of webinars, podcasts, and learning labs to help investors learn about trading and financial markets.
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How money market funds work
Money market mutual funds have been around since the 1970s, but last year’s failure of Silicon Valley banks and the Federal Reserve’s rate hikes have sparked a resurgence of interest in mutual markets. These funds are provided by brokerage firms and invested in low-risk, short-term assets such as Treasury bills, corporate and municipal bonds, and certificates of deposit (CDs). Interest is usually paid monthly.
The yield on money market funds tends to fluctuate with changes in the federal funds rate. These are highly liquid investments, making them a good place to park funds that you need to access again quickly.
Are money market funds safe?
Because money market funds are mutual funds rather than bank accounts, they are not insured by the Federal Deposit Insurance Corporation (FDIC), but they are still safe. (Note that money market funds are different from money market accounts, which are a type of savings account offered by banks and credit unions.)
why? Money market funds must have a net asset value (NAV) of $1 per share.
“Money market funds maintain a net asset value or closing price. [a] $ per share. That’s the overall goal of a money market fund. In reality, you won’t see price changes, which creates a safety feature, says Sofoan Prak, a certified financial planner (CFP) and financial advisor at Vanguard. “It’s possible that there have been money market funds throughout history that have invested a lot of money, but it’s very rare.”
In other words, money market funds are less volatile investments, so you are less likely to lose money investing.
When investing in money market funds, be sure to choose a brokerage firm that is insured by the Securities Investor Protection Corporation (SIPC). SIPC insurance won’t protect you if your money market fund fails, but it will protect your investment up to $500,000 if your intermediary fails.
Types of money market funds
There are several different types of money market funds. Some people invest in corporate bonds, some in government bonds, and some in both.
- municipalities: These funds are invested in municipal bonds, which are bonds issued by cities and states, so they are exempt from federal taxes. They generally have lower yields than other types of money market funds.
- government: These funds are invested in Treasury and other federal government securities.
- Prime: These funds are invested in government bonds, CDs, corporate bonds, etc.
Who are money market funds suitable for?
Anyone can invest in a money market fund, but it’s best to invest in money you plan to use in the near future, such as a vacation you want to take in a year’s time.
“financial market [funds] It’s really for short-term needs, like an emergency fund,” Plaque said. “If you actually need the money to pay your bills, or if you need the money in the next year or two, use a money market fund instead of keeping it in your local bank or banks. A good investment would be a savings account. ”
Some money market funds offer yields well above 4%, but you don’t have to commit that much money, especially if you’re investing for the long term. Money market yields typically do not exceed inflation. Yields are also likely to fall as the Federal Reserve plans to cut interest rates later this year.
Advantages and disadvantages of money market funds
While money market mutual funds can be of great benefit to many investors, they are not the best choice for everyone. The important points to remember are:
Strong Points
- Main protection. You can protect your initial investment and, depending on the interest rate, potentially earn a decent return.
- Some offer tax benefits. By investing in a municipal money market fund, you can avoid paying federal taxes on your investments.
- Liquidity. You will typically have access to your cash within a few business days.
Cons
- Yields may not be able to beat inflation. If you want an investment that outperforms inflation, try stocks and bonds instead of money market funds.
- Lack of insurance. Money market mutual funds are not insured by the FDIC or the National Credit Union Administration (NCUA).
Take out
If you want to earn a decent yield but still have access to cash whenever you need it, money market mutual funds are a great option. While this low-risk investment may not be the best place to stash your money in the long run, it can be a good place to store your emergency fund or savings that you need to access immediately. There is a possibility.
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