Money Market Funds

How Much Do You Know About Them?   Looking for an investment that’s highly liquid and presents very little risk to your principal? A money market mutual fund* may be a good choice.   Money market mutual funds typically invest in high-quality, short-term securities, such as U.S. Treasury securities, certificates of deposit, federal agency notes, and commercial paper (short-term notes issued by a variety of domestic and foreign corporations that present minimal investment risk). Tax-exempt money market funds invest in municipal securities issued by state and local governments. They generally pay dividends that are exempt from federal and/or state income taxes.   The ease of buying and selling shares makes money market mutual funds an ideal place for assets that you’ll need relatively soon. Funds frequently offer check-writing privileges. The Rules. A money market mutual fund is required to hold a diversified portfolio of high-quality securities with a weighted average maturity of 90 days or less. Generally, a fund may not invest more than 5% of its assets in the securities of a single issuer, with the exception of securities issued by the federal government or its agencies.   Breaking the Buck. Money market mutual funds are structured to maintain a stable net asset value (NAV) of $1 per share. “Breaking the buck” is the term that’s used if the fund’s NAV falls below this amount. Although breaking the buck is rare, money market mutual funds are not FDIC-insured, so investors will lose some of their original investment when this happens.   Before You Buy. While money market mutual funds are low-risk investments, interest-rate shifts, unanticipated redemptions, major credit downgrades for firms represented in the fund, or a drop in the federal funds rate are potential risks for investors. Make sure you review the fund’s holdings, and remember that the fund with the highest return usually presents the most risk. Larger firms may be less affected than smaller firms by short-term volatility.   Money Market Accounts — Know the Difference. A money market account is not the same as a money market mutual fund. When you deposit money in a money market account, the bank invests the assets to make money for itself and pays you a specific rate of return. Money market accounts generally are FDIC insured, may require a minimum balance, and often limit transactions.   A money market mutual fund offers a low-risk, highly liquid investment option for investors seeking a higher return than a bank account may provide.   * An investment in the fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the fund.

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