Money market funds typically invest in higher-yield, short-term debt securities. Are they right for you? Learn more here.
When it comes to saving for your short-term goals like a car or home, you have choices. And as interest rates appear to have started a slow climb from zero, where they spent most of the last decade, many bank checking and savings accounts have yet to budge. You might, then, be on the lookout for an investment that:
In short, an investment product that is similar to a cash savings account but potentially with a higher yield along with higher risks.
Enter money market funds.
Money market funds are essentially mutual funds that invest in money market instruments: U.S. Treasuries, municipal securities, certificates of deposit (CDs), commercial paper, repurchase agreements, and bankers’ acceptances.
Note that a money market “fund” is not the same as a money market “account.” A money market fund is a type of mutual fund that invests in money market instruments; hence, it’s an investment product that you must directly buy or sell.
But let’s back up for a moment. If you aren’t familiar with any of these terms, here’s a brief explanation:
You may not be as familiar with the last three asset classes mentioned below—commercial paper, repurchase agreements, and bankers’ acceptances—as you are with the first three. If this is the case, don’t be surprised as they’re generally “off-limits” to most retail investors. Instead they’re traded between financial and corporate institutions. Here’s a brief description of each:
Like every investment product, money market funds—or maybe it’s better to think of them as “money market mutual funds"— have their advantages and disadvantages. It’s important for you to assess how these opportunities and limitations align with your financial goals, investment style, and risk tolerance as you consider money market investing.
Money market mutual funds are designed to provide steady interest income with low risk. Shares held by “retail” investors, although not guaranteed, seek to maintain a NAV of $1 per share.
Some money market funds, namely those investing in certain municipal securities, can provide a tax advantage at the state and federal level. Unlike actual money market accounts, money market funds generally require a comparably lower minimum investment. Remember: Since money market funds pool assets from multiple investors and typically invest in a wide array of investments, they can give retail investors exposure to a diversified portfolio of securities at a lower minimum investment. Some money market funds are more diversified than others, so it’s important to read each fund’s prospectus before investing.
Also, if you’re a retail investor who wishes to gain exposure to commercial paper, repos or bankers’ acceptances—investments typically available to institutional investors—money market funds allow you such exposure.
Money market funds can be relatively inexpensive to own and don’t impose withdrawal fees. However, keep in mind that some companies charge a small annual fee or may charge a fee if the amount you have invested with the fund is below a minimum threshold. Also, many money market funds limit the number of times you can withdraw in a month.
Although money market mutual funds are typically considered safe investments, it is possible to lose money by investing in such funds. They aren’t FDIC-insured, nor are they guaranteed by the U.S. government or government agency. Money market funds are not deposits or obligations of or guaranteed by any bank, (unlike the money market accounts offered by your local bank, which are typically FDIC-insured).
Another thing to consider when you invest in money market mutual funds is that their yield may not always keep up with the rate of inflation, a situation in which your gains may experience erosion during periods of higher inflation. Lastly, money market funds may not match the higher growth potential of stocks and other investment products that carry higher risk.
When investing in tax advantaged funds, they may pay dividends that are subject to the alternative minimum tax and also may pay taxable dividends due to investments in taxable obligations.
You can learn more about these funds by visiting the TD Ameritrade Money Market Funds page. Remember that these funds are part of a much larger family of mutual funds offered at TD Ameritrade.
Carefully consider the investment objectives, risks, charges and expenses before investing. A prospectus, obtained by calling 800-669-3900, contains this and other important information about an investment company. Read carefully before investing.
Money market funds, like mutual funds, are neither FDIC-insured nor guaranteed by the U.S. government or government agency and are not deposits or obligations of, or guaranteed by, any bank. There can be no assurance that these funds will be able to maintain a stable net asset value of $1 per share. It is possible to lose money by investing in Money Market Funds. Tax exempt funds may pay dividends that are subject to the alternative minimum tax and also may pay taxable dividends due to investments in taxable obligations.
The Fund may impose a fee upon sale of your shares or may temporarily suspend your ability to sell shares if the Fund’s liquidity falls below required minimums because of market conditions or other factors.
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