Money market mutual funds are low-risk and short-term investments that are liquid by nature. Issuers are generally companies that invest in other money market instruments. Investors can choose between government securities and commercial papers of private companies. The primary objective of a money market fund is to protect the principal investment while generating income through interest payments. Hence, it acts as a competitive alternative to savings accounts in banks.
As is the case with most mutual funds, a money market fund offers diversification, thereby adding required safeguards to portfolios. Market participants do not have to select and invest in various money market securities individually. These funds seek to maintain a stable net asset value (NAV) per share, usually fixed at $1. To ensure stability, these funds invest in instruments such as Treasury bills, certificates of deposit, commercial paper and short-term corporate debt.
While money market funds are relatively safe, they are not entirely risk-free. Certain types of funds, like government and Treasury funds, may be safer than others in terms of credit risk. These are backed by the full faith and legitimacy of the U. S. Federal government, lending them credibility.
Since the turn of the millennium, the financial assets of the money market mutual funds in the United States have grown steadily. In 2023, the financial assets of the money market mutual funds exceeded $6.3 trillion, a significant increase of 20% from the previous year.
Per the Investment Company Institute, total money market fund assets increased by $41.65 billion to $6.9 trillion for the week ended Wednesday, Jan. 22. Among taxable money market funds, government funds increased by $34.90 billion and prime funds increased by $8.17 billion. Tax-exempt money market funds decreased by $1.43 billion.
All major fund families have these products in their offerings today. For instance, Vanguard launched the Vanguard Federal Money Market Fund in 1981 and Fidelity launched the Fidelity Government Money Market Fund in 1990. American Century launched one of the earliest money market funds, The American Century Investments Capital Preservation Fund Investor Class, in 1972. Even big banks like JPMorgan Chase & Co. JPM are in the fray with funds like JPMorgan Prime Money Market Fund and Morgan Stanley MS with Institutional Liquidity Funds - Money Market Portfolio.
For these reasons, money market mutual funds might provide much-required stability in a high-rate environment market. Hence, astute investors should consider such funds at present. Mutual funds, in general, reduce transaction costs and diversify portfolios without an array of commission charges that are mostly associated with stock purchases (read more: Mutual Funds: Advantages, Disadvantages, and How They Make Investors Money).
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