Money market funds are very similar to mutual funds. With a mutual fund, your money is pooled with other investor’s money and it is all divided among many different investments.
Money market funds are the same, except the money is invested in government securities. They are not federally insured like general savings accounts, but they are lower in risk than regular mutual funds.
What types of securities will my money be invested in?
Money market fund accounts invest in highly liquid and low risk securities. Liquid means that it can be taken out very quickly. A savings account in your bank is highly liquid because you could go to the bank and take out money right away. Real estate has low liquidity because it would take time to get the money back that you invested into it.
The government securities that they invest in are usually certificates of deposit (aka CDs), commercial paper of companies, and other short term investments. In the U.S. these funds are regulated by the Securities Exchange Commission or SEC.
How do Money Market Funds work?
The value of a money market fund is always $1. The value doesn’t fluctuate like a share of stock, it earns interest similar to a bond. The securities always include short term bonds that reach maturity in 90 days or less. This allows for low risk.
If you are interested in investing in a fund, I would suggest a traditional mutual fund. They are higher risk, but can probably earn you more money. If you are interested in low risk government securities and don’t have a lot to invest, I suggest going for government bonds.