Are Money Market Funds Right for You? What You Need to Know

Money market funds typically invest in higher-yield, short-term debt securities. Are they right for you? Learn more here.

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https://tickertapecdn.tdameritrade.com/assets/images/pages/md/Reaching for the prize: money market funds for enhanced yield.
5 min read

When it comes to your short-term savings, 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:

  • Can provide relatively high returns (vs. bank accounts) with minimal price volatility
  • Combines sophisticated institutional assets into a simple product

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. 

What Is a Money Market Fund?

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 a 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:

  • Money market instruments designate an assortment of highly liquid debt securities, most of which have short-term maturity dates, and all of which are issued by creditworthy government or banking institutions. Investors typically gain indirect access to these individual securities through a money market account, an interest-bearing account that offers higher yield than the average savings account.
  • Money market funds, on the other hand, are products that combine different money market instruments to achieve a diversified range of debt exposure and yield. Their objective is to earn interest with minimum risk while maintaining a net asset value (NAV) of $1 per share, although it is important to remember this can’t be guaranteed. (Note that institutionally held funds are subject to a floating NAV while those held by retail investors and government institutions may be exempt from this float.) 

You may not be as familiar with the last three asset classes mentioned above—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:

  • U.S. Treasuries. Interest-paying debt securities—bills, notes, and bonds—issued by the U.S. government; maturities range from one to 30 years
  • Municipal securities. Interest-paying securities that municipal and state governments issue to finance its various operations
  • Certificate of deposit. A promissory note issued by a bank that agrees to pay a fixed amount of interest in exchange for depositing cash for a specified time period
  • Commercial paper. Short-term debt (promissory notes) issued by companies to pay liabilities that need to be met immediately; maturities typically last no longer than 270 days
  • Repurchase agreement (repo). A short-term debt agreement in which a dealer, selling government securities to an investor as collateral in exchange for cash, agrees to “repurchase” the securities, typically on the following day at a price that includes interest
  • Bankers’ acceptances. A promised future payment, similar to a post-dated check, issued and guaranteed by a bank   

Money Market Funds: The Pros and Cons

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 trading.

The Pros

Money market mutual funds are designed to provide steady interest income with very low risk. Shares held by “retail” investors, although not guaranteed, seek to maintain a NAV of $1 per share, providing you relief from volatility and risk of principal loss associated with other types of investment products.

Some money market funds, namely those investing in certain municipal securities, 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 and give you the advantage of gaining exposure to certain institutionally traded assets that are otherwise inaccessible to retail investors.

Money market funds can be relatively cheap 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 your account falls below a certain level. Also, many money market accounts limit the number of times you can withdraw in a month. 

Cons

Although money market mutual funds are considered safe investments, it is possible to lose money by investing in Money Market Funds. They aren’t FDIC-insured, nor are they guaranteed by the U.S. government or government agency. They are also not deposits or obligations of or guaranteed by any bank, unlike money market accounts. 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 exempt 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.


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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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Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.

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The information is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.

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