You may have heard about something called a money market fund or money market mutual fund, or even a money market account. And you might be wondering, “what the heck are these things?”
Money Market Fund
Money market mutual funds, despite being somewhat of a mouthful, are essentially low-risk, low-return mutual funds. The funds are considered super safe investments because they usually hold a bunch of short term corporate and municipal bonds, and do not carry the same degree of volatility seen in the wider market. Despite being considered safe investments, they are still securities, which means there’s always going to be a risk that the investment can lose value.
You might already have some investments in a money market mutual fund if you are a Vanguard customer. Vanguard automatically puts any money left in your settlement account into VMFXX, which is their flagship money market fund.
Why Invest in a Money Market Fund?
Investing in a money market fund might make sense if you’re at or approaching retirement and want some benefits that come from certain tax-advantaged money market fund investments. For most of us though, the benefits we’d get from a money market fund are similar to those of a high-yield savings account. However, a high yield savings account has the added perk of being no-risk in that you are guaranteed to not lose any value off your original deposit. You can even find high yield savings accounts offering around 2% APY, right now which is a higher return than most money market funds.
Money Market Account
Finally, I wanted to mention that money market accounts are different from money market funds. They are even more similar to a savings account than a money market fund is, and they basically offer the same advantages of a savings account with more flexible withdrawal options.
Interest rates are the highest they’ve been in years, and if we return to an extremely low-rate environment, money market funds might start making more sense for a place to park some cash. For now, I’m keeping my money in a high yield savings account.