A money market is a type of fund that carries a relatively low risk to investors. Money market funds make investments in a variety of types of securities that have a maturity date of one year or less. This short maturity allows money market funds to respond quickly to changes in the marketplace, minimizing risk to investors. Money market funds attempt to keep their net asset value of shares in the fund – the ratio of assets to liabilities – at one, though the yield of the shares may go up or down.
Government securities are guaranteed by the governments of cities, states or even the federal government. Examples of government securities include municipal bonds and United States Treasury certificates. These securities have a very low risk of default. They also may pay lower rates or return than less risky instruments. Some government securities, such as U.S. Treasury bonds, are also exempt from local and state income tax.
Certificates of Deposit
Banks issue certificates of deposit, commonly referred to as CDs, which are guaranteed by the Federal Deposit Insurance Corporation. Even if the bank fails, holders of CD will receive full payment when their CD matures. Investors must hold a CD for a defined length of time before they can collect all of the interest the CD earns. Money markets invest in CDs with maturity dates of less than one year.
Commercial paper is a promissory note issued by a large corporation or financial company. The note promises the company will pay a specified amount at maturity, which must be less than 270 days. Investors who purchase commercial paper essentially agree to provide a short-term loan to the business. Commercial paper may be guaranteed by the assets of the company – referred to as asset-backed paper, or it may be unsecured.
A money market mutual fund is not the same as a money market deposit account at a bank. The bank guarantees payment of a defined rate of interest you’ll know ahead of time, and the funds you keep in the money market account are guaranteed by the FDIC. The earnings you receive from investments you make in a money market mutual fund may vary over time and all the funds you invest in a money market mutual fund may not be insured. Check the prospectus of the money market mutual fund you’re interested in for a listing of the types of securities the fund invests in, as well as a history of the fund’s performance.
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