I’m sure you have encountered the financial term “Money Market” in your quest to do something valuable with your money. This week in the Knowledge Corner we will cover a few basic knowledge points to give you a better understanding for what the Money Market really is and what the most common financial product used to invest in it is.
1. The Money Market was created to offer investors a relatively safe place to keep money for short periods of time while still earning a small rate of return that could be more advantageous compared to a regular bank savings or checking account.
2. A Money Market Fund (MMF) is a Mutual Fund that is required by law to invest in short term, low-risk securities and to maintain a stable value of its shares.
3. In the United States, Money Market Funds are regulated through the Investment Company Act of 1940. This Act regulates what a MMF can hold in its portfolio in regards to maturity, diversity and quality of the securities.
4. A Money Market Fund’s goal is to maintain a stable Net Asset Value of its shares. Unlike other investment funds, it’s not supposed to generate the highest possible returns to its investors by exposing them to risk. Instead, its main purpose is to offer an investment product that is relatively secure compared to other mutual funds and mimics the highly liquid feature of a typical savings or checking account. Simply put, a MMF highest priority is to never lose money.
5. The securities a Money Market Fund invests in must be of highest quality. Securities that are considered to be of highest quality are securities such as short-term government issued bonds, CD’s and short-term commercial papers with the highest credit ratings.
6. A Money Market Fund is not exactly the same thing as a Money Market Account. MMA’s are offered by bank institutions and often have typical bank product practices e.g. check writing. A MMF is offered as an investment product by brokerage institutions and typically offers an automatic sweeping ability. The sweeping process ensures that no cash is sitting idle in a brokerage account. Any cash available is swept in to a MMF and as soon as a cash withdrawal is requested or securities are purchased in the account, cash is swept out of the MMF. Meanwhile, it’s earning a small yield for the brokerage account holder.
7. There are a few different types of Money Market Funds that you may encounter:
- Prime money fund
- Government and Treasury money funds
- Tax-exempt money fund
- Institutional money fund
- Retail money fund
They all have different benefits and uses that we will cover in a different post.
8. The largest Money Market Fund is Vanguard Prime Money Market Fund. It has assets over US $120 billion.
9. It’s very rare that an investor loses money in a money market product. But it’s not impossible. Fortunately, there is barely a handful of money market funds that have “lost” (Net Asset Value per share sinking under $1) money since the creation of money market products in 1971.
Armed with new knowledge?