Money Market Mutual Funds

One of the more widely held investment vehicles, money market mutual funds, or money market funds, provide the investor with a highly secure, liquid account that earns interest. These funds are gen- erally used to stabilize a portfolio, as well as be the cash portion of the asset allocation. Money market funds are thought of as cash investments because the mutual fund company usually sells shares for $1 apiece, as well as usually redeeming the shares for $1 each.

These accounts may also offer the investor check-writing privileges. While these accounts do earn interest, it’s usually a far cry from what the investor may earn if the money were invested in the stock market or in bonds. However, the interest rates on money market funds are much higher than a regular savings account at a bank. These accounts are designed to be liquid, safe, and convenient. They, therefore, make an excellent choice to hold cash reserve money. Be aware, though, that the mutual fund companies may not redeem the money market funds’shares at par ($1 per share). Look at the underlying short-term securities that the company holds, because this may inhibit the company’s ability to pay par value for the shares. Money market funds aren’t federally guaranteed, as bank accounts are. However, money market accounts issued by banks are FDIC insured for up to the limit of $100,000.

TAXABLE MONEY MARKET FUNDS. These funds invest in a variety of interest-bearing securities. Some invest in only U.S. government obligations, such as Treasury bonds and notes, while others invest in U.S. government obligations plus securities backed by the federal government. Still others will invest in commercial paper, CDs, and other cash-equivalent investments. Those funds that are invested solely in government obligations are considered the safest. The interest on these accounts would be taxable for federal income tax purposes, and perhaps for state and local tax purposes, as well.

TAX-EXEMPT MONEY MARKET FUNDS. Typically, the interest earned on these accounts isn’t counted as part of the investor’s income for federal income tax purposes. They may, however, be counted as part of the income for state and local tax purposes. These funds may fall into two categories: national tax-exempt money market funds or state tax-exempt money market funds.