Money Market Funds: A Beginner's Guide to Safe & Liquid Investing

Investing in a money market fund can provide you with several different benefits and features. Money market funds are offered by a variety of mutual fund providers. Here are the basics of money market mutual funds and why you might potentially want to invest in one.

Money Market Funds

A money market fund is a mutual fund that invests in money market instruments. They should not be confused with a money market account that is offered by most banks. Investments will be made in things like T-bills, CDs, repurchase agreements and commercial paper.

Parking Spot

Many investors and fund managers consider money market mutual funds to be a great place to park unused cash. These mutual funds are great for individuals that are selling shares of one mutual fund but do not have another mutual fund that they want to invest in yet. Instead of parking the money in a savings account or a CD, they can simply put the money into a money market mutual fund. By doing this, they will be able to earn 1 to 2 percent more on their money. Therefore, many investors will utilize this type of account at the recommendation of their financial broker at some point.

Using the Money

Money market mutual funds have a unique way for you to access the money that is in the fund. If you ever need to use the money, you can simply write a check, and it will be drawn on the money in the mutual fund. In most cases, there will be a minimum amount that you will be able to write a check for. It may be several hundred dollars or $1000. They usually have a higher minimum check amount so that you will not use the checks for everyday purchases. They do not want to turn a mutual fund into a glorified checking account. However, they do make it very simple for you to access the money when you need it.

Buying Shares

Money market mutual funds are very easy to get your hands on. This type of investment is available at any financial brokerage. You can also purchase them directly from mutual fund companies. In some cases, you will be able to get involved with them through your local bank. In most cases, regardless of where you buy them, you will have to deal with a minimum investment to get involved. For example, the company might require you to invest at least $500 before you can get into the fund. The minimum investment is usually very small and is designed to cater to smaller investors.

Types of Funds

Not every money market fund invests in the same securities. One type of fund invests in only United States Treasury instruments. Another type of fund invests in a combination of government-sponsored enterprises and Treasury notes. A third type of fund invests in a combination of money market securities to provide a diversified portfolio.