A Money Market Fund Can Help Support Your Overall Financial Plan
A money market fund is a type of mutual fund that invests in short-term treasuries and other money market instruments, including U.S. government securities and commercial paper. Due to the nature of the short-term investments, these are considered to be highly liquid. That means they can be exchanged for cash easily, giving investors access to their money when they need it. In addition, money market funds typically offer a better yield than those available from a standard bank savings account.
The U.S. Securities and Exchange Commission mandates that only the highest credit-rated securities are available in money market funds. For the most part, money market funds are among the safest of all investments, with a target value of $1 per share. Money market funds have only dipped below this value (a term known as “breaking the buck”) on a small number of occasions associated with financial crises, but have quickly bounced back.
Here are some key ways that a money market fund can help support your overall financial plan:
- Funding short- to intermediate-term financial goals.
- If you’re saving for a financial goal that falls within the next three to five years, a money market fund may make sense. This could include such goals as saving for a vacation or wedding or a down payment for a house. In these cases, it may be more important that your savings hold their value over the shorter time period.
- Maintaining an emergency fund.
- Having money saved in a money market fund can act as a personal safety net to get through financial hurdles, such as a period of unemployment or an unbudgeted large expense (such as a car or roof repair, or a dishwasher or washing machine/dryer replacement). Many financial professionals recommend an amount that could cover three to six months of expenses. The liquidity feature of money market funds makes them a good option for this.
- Temporary holding place for assets.
- A money market fund may also be used as a place to temporarily hold or transfer assets, such as an individual retirement account rollover or an inheritance, while trying to decide how to invest those funds for the long term. The fund should not be used as a long-term investment vehicle.
What's in a Name?
While they sound similar in name, a money market fund is not the same as a money market account. A money market fund is an investment that is sponsored by an investment fund company. Therefore, it carries no guarantee of principal. A money market account is a type of interest earning savings account. Money market accounts are offered by financial institutions and are insured by the Federal Deposit Insurance Corporation.
Keep Your Long-Term Investment Strategy in Perspective
While money market fund yields are rising as they benefit from the Federal Reserve raising interest rates, they aren’t appropriate for long-term investing — particularly in your 401(k) or other workplace retirement plan — as the returns tend to be much lower than stocks and bonds. In addition, over time, the returns have not kept pace with inflation.
Disclosure: This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. Investment Advice and 3(38) Investment Fiduciary services offered through Diversified Financial Advisors, LLC, a Registered Investment Advisor. 3(16) Administrative Fiduciary Services provided by PISTL Service Corporation. Discretionary Trustee services provided by Printing Industries 401k Trustees. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material.
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