MONEY MARKET

MONEY MARKET FUNDS
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A money market fund is a type of mutual fund that is required by law to invest in low-risk securities. These funds have relatively low risks compared to other mutual funds and pay dividends that generally reflect short-term interest rates. Unlike a "money market deposit account" at a bank, money market funds are not federally insured.

Money market funds typically invest in government securities, certificates of deposits, commercial paper of companies, and other highly liquid and low-risk securities. They attempt to keep their net asset value (NAV) at a constant $1.00 per share—only the yield goes up and down. But a money market’s per share NAV may fall below $1.00 if the investments perform poorly. While investor losses in money market funds have been rare, they are possible.

Before investing in a money market fund, you should carefully read all of the fund’s available information, including its prospectus, or profile if the fund has one, and its most recent shareholder report.

Money market funds are regulated primarily under the Investment Company Act of 1940 and the rules adopted under that
Act, particularly Rule 2a-7 under the Act.

When you invest in a money market, you are investing in a unique type of mutual fund. Money market mutual funds are designed to yield modest returns while preserving principal. These funds focus on maintaining net asset values (NAVs) of $1.00. Essentially, money market mutual funds are considered, by some, to be along the same lines as high-yield bank accounts. Unlike bank accounts, however, they are not insured against loss. Typical restrictions are that a fairly high minimum balance must be maintained in order to avoid fees.

Since the account is not considered a transaction account, it is subject to the regulations on savings accounts: only six withdrawal transactions to third parties are permitted per month, only three of which may be paid by check. Banks are required to discourage customers from exceeding these limits, either by imposing high fees on customers who do so, or by closing their accounts. Banks are free to impose additional restrictions (for instance: some banks limit their customers to six total transactions). ATM transactions may or may not be counted.

In theory these restrictions allow the bank to invest the money with more discretion, allowing a higher return. The return is often competitive with money market mutual funds, hence the name on the account, although nothing requires a bank to invest MMDA deposits in the money market (most likely they will be invested the same as the bank's other deposits, e.g. in mortgage).

If you want to compare money market fund yields, there is no need to convert these yields to an APY for comparison. Where some type of an adjustment is necessary is when you compare the yields on a money market fund to a money market account or a certificate of deposit. In those cases Bankrate's certificate of deposit calculator will calculate an APY you can use to compare the investments.

ADVANTAGES;
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The main advantages of money market deposit accounts include:

- Your money is not locked into a specific investment term, as is the case with a fixed or notice deposit. You can deposit your money into a money market account today and withdraw it tomorrow without having to give the bank notice. Obviously, the longer your money remains in the account, the more interest you will earn.


- Your capital in a money market account is guaranteed.


- The interest rates are more stable than with money market unit trusts. Although the rates may vary, they rarely move unless the prime lending rate changes.


DISADVANTAGES
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Your investment becomes part of the bank's assets. Although the bank is obliged to repay your capital investment and the promised returns, if the bank collapses - as occurred with Saambou - you stand to lose all or some of your money, depending on the extent to which the failed bank's liabilities exceed its assets.


So, money market funds may make sense for investors who think the stock market won't match the modest returns these funds offer over a certain time period, although trying to time the market isn't necessarily the best strategy. These funds are a natural fit for investors who just want to make sure they can preserve their nest egg, while returning modest gains.