If you're looking for a financial tool that doesn't carry a high degree of risk, money market mutual funds are an ideal choice. Structured to be highly liquid and a stable investment, they're an integral part of many investors' portfolios.
On any championship sports team, there are role players. These are the athletes who have specific talents that complement the talents of the stars and add overall excellence to the team. A money market mutual fund is an important role player in an investment portfolio. It's a low-risk instrument that investors can use for their liquid needs.
A parking place for liquid funds
Money market mutual funds have a great deal of liquidity and generally earn a slightly higher interest rate than traditional savings accounts. This combination makes them an ideal place for an investor to park a large chunk of money on a short-term basis-such as when she's researching a new investment, for example. The interest rates are slightly higher than a savings account because the funds invest in high quality, short-term investments-many of them backed by the government.
Protection for rainy days
A money market mutual fund offers simplified withdrawal features that are similar to checking accounts. You can write checks from the account, or make transfers to your bank account electronically or by mail. Because of this liquidity, many people use the money market mutual fund as the savings place for their emergency funds, which are generally three to six months worth of income.
These accounts are ideal for rainy-day funds because they don't require a high minimum deposit. Generally, minimum investments range from $500 to $5,000. You can establish an account directly from a brokerage or mutual fund company, or you can check with your local bank or credit union. Almost every financial institution offers a money market mutual fund for its customers.
Because money market mutual funds invest in many government-backed securities, investors may enjoy some tax benefits. Tax-exempt funds, for example, invest only in securities issued by state and local governments. These are exempt from federal taxation, which is a real plus for people who are subject to higher federal income tax brackets.
There are occasions where an investor can realize the "hat trick" of tax benefits. If you find a money market mutual fund that invests in securities issued by your own home state, you have the potential to save money on federal, state, and even local taxes.
Experienced investors understand that money market mutual funds do not generate the high returns of many stocks or stock mutual funds. They know that this investment is like a role player on a championship team. Its job is to provide liquidity, stability, and even some tax breaks. The money market mutual fund does all three things successfully, making it a key player in any winning portfolio.