Money Market Mutual Funds

There is a proposal along with the Resolution Trust Corporation idea for the Us government to back Money Market Mutual Funds whose value may be dropping because of the current credit crunch. Lots of people wind up putting money into money market funds between purchasing stocks with their cash. I’m sure with the recent ban on short selling stocks, that there is quite  a bit of money moving into money market mutual funds. Think of  a money market mutual fund like a normal mutual fund, but they invest in cash type investments such as CD’s.The plan would help to shore up the money market mutual funds which have falling values. Ideally Money Market Mutual Funds that are well managed are fairly safe bets in an environment with fluctuating market prices, but this announcement by the US Treasury leads to the question of whether they are really all that safe. It likely depends upon, like any other investment, the person managing the money market mutual fund.

Money Market Mutual Funds

What Is a Money Market Fund?
A money market fund is a mutual fund that invests solely in cash/cash equivalent securities, which are also often referred to as money market instruments. These investments are short-term, very liquid investments with high credit quality.

They generally include:

Certificates of deposit (CDs)
Commercial paper
U.S. Treasuries
Bankers’ acceptances
Repurchase agreements
Securities and Exchange Commission (SEC) rules dictate that the average maturity of money market fund securities must be 90 days.

Just like any other mutual fund, money market funds issue redeemable units (shares) to investors and must follow guidelines set out by the SEC. All the attributes of a mutual fund apply to a money market mutual fund, with one exception that relates to its net asset value. We’ll take an in-depth look at this exception later on.

Money Market Funds Vs. Money Market Accounts
A key difference between money market funds and money market accounts is that the former are sponsored by fund companies and carry no guarantee of principal, while the latter are interest-earning savings accounts offered by Federal Deposit Insurance Corporation-insured financial institutions with limited transaction privileges. In this case, account principal is guaranteed up to $100,000 by the FDIC. Money market accounts usually pay a higher interest rate than a passbook savings account, but generally a slightly lower interest rate than a bank certificate of deposit or the total return of a money market fund.

 

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