Money market fund

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Money market fund

A mutual fund that invests only in short term securities, such as bankers' acceptances, commercial paper, repurchase agreements and government bills. The net asset value per share is maintained at $1.00. Such funds are not federally insured, although the portfolio may consist of guaranteed securities and/or the fund may have private insurance protection.

Money Market Fund

A mutual fund that invests exclusively in short-term, low-risk securities. Examples of investments in money market funds are certificates of deposit and U.S. Treasury securities. Money market funds attempt to keep their net asset values at $1 per share, such that only the yield changes. Money market funds are usually not federally insured, but the risk is so low that they very rarely lose principal for the investor. However, yields are very low and thus money market funds are subject to inflation risk; that is, the yield on a fund may be less that the inflation rate, resulting in a loss. See also: Money market security, Money market note.

money market fund

A mutual fund that sells shares of ownership and uses the proceeds to purchase short-term, high-quality securities such as Treasury bills, negotiable certificates of deposit, and commercial paper. Income earned by shareholders is received in the form of additional shares of stock in the fund (usually priced at $1 each). Although no fees are generally charged to purchase or redeem shares in a money market fund, an annual management charge is levied by the fund's advisers. This investment pays a return that varies with short-term interest rates. It is relatively liquid and safe but varies in yields and features. Both taxable and tax-exempt varieties of money market funds are offered. Also called liquid asset fund. See also average maturity.

Case Study Choosing between a taxable and tax-exempt money market fund is a function of an investor's marginal tax rate and the difference in yields between the two types of funds. A higher marginal tax rate makes it more likely an investor will earn a higher aftertax return from owning a tax-exempt fund as opposed to a taxable fund. Likewise, the smaller the difference in yields between the two funds, the more likely an investor will benefit from choosing a tax-exempt money market fund. In late November 2001 the largest taxable money market fund managed by Smith Barney paid an average seven-day annualized yield of 1.88%. At the same time the firm's main tax-exempt fund offered a yield of 1.36%. An investor in the 35% federal tax bracket who owned the taxable fund earned an aftertax return of 1.88 × (1 - .35), or 1.22%. This investor paid the Internal Revenue Service 35% of the 1.88 taxable yield, leaving a return of only 1.22% after taxes. Thus, an investor in the 35% tax bracket would have been better off owning the tax-exempt money market fund that paid an aftertax yield of 1.31%. On the other hand, an investor who faced a marginal tax rate of 27% earned an aftertax return of 1.88 × (1 - .27), or 1.37%, by owning the taxable money fund, somewhat better than the return provided by the firm's tax-exempt fund. The yield difference between taxable and tax-exempt funds is constantly changing, so it is important for an investor to remain alert and consider transferring money from one type of fund to the other as yields warrant.

Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor by David L. Scott. Copyright © 2003 by Houghton Mifflin Company. Published by Houghton Mifflin Company. All rights reserved. All rights reserved.

Money market fund.

Money market mutual funds invest in stable, short-term debt securities, such as commercial paper, Treasury bills, and certificates of deposit (CDs), and other short-term instruments.

The fund's management tries to maintain the value of each share in the fund at $1.

Unlike bank money market accounts, money market mutual funds are not insured by the Federal Deposit Insurance Corporation (FDIC).

However, since they're considered securities at most brokerage firms, they may be insured by the Securities Investor Protection Corporation (SIPC) against the bankruptcy of the firm. In addition, some funds offer private insurance comparable to FDIC coverage.

Tax-free money market funds invest in short-term municipal bonds and other tax-exempt short-term debt. No federal income tax is due on income distributions from these funds, and in some cases no state income tax.

While taxable funds may offer a slightly higher yield than tax-free funds, you pay income tax on all earnings distributions.

Many money market funds offer check-writing privileges, which do not trigger capital gains or losses, as writing a check against the value of a stock or bond fund would.

References in periodicals archive ?

Yellen drew attention to the shadow banking industry consisting of tri-party repurchase agreement markets and money market mutual funds, and said that these were vulnerable areas that required greater regulation.

-Big banks could need more capital, says Federal Reserve official

Our recommendation: try money market mutual funds and money market accounts.

Keeping your interest up: interest-paying alternatives to soaring bank fees

The growth of M2 in July owed in part to a sizable increase in liquid deposits, but in light of a resumption of run-offs at bond mutual funds it also may have reflected a renewed preference by households for the protection of principal provided by money market mutual funds. The strength in M2 showed through to M3, which also was boosted by funds garnered from wholesale sources to finance a surge in bank credit.

Minutes of the Federal Open Market Committee Meeting held on August 16, 1994

Companies' strategies to deal with this include pulling cash from large business checking accounts into money market mutual funds, treasury bills and other short term investments.

-US companies to reduce bank balances if TAG is not renewed

The income and growth preservation model she endorses is: 50% blue-chip stocks, which she says have had a 10% to 12% average return since 1920; 40% short-term bonds, like treasuries and corporate securities; and finally 10% in "cash on hand" instruments, like money market mutual funds and CDs.

LDDS rides high on insider trading

For example, some flows into bond mutual funds were reversed; investors, fearing further rate increases and awakening to the nature of the risk they had taken on, shifted funds back into shorter-term money market mutual funds and into deposits.

Statement by Alan Greenspan

Under the agreement, nearly USD17bn in money market mutual fund assets currently managed in nine RidgeWorth money market mutual funds will transition to six existing Federated money market mutual funds with similar investment objectives.

SunTrust completes review of RidgeWorth Capital Management

The British bank said that if money market mutual funds were to put more cash into Treasury bills and repurchase agreements rather than bank commercial paper, US borrowing costs could increase.

Barclays says US borrowing costs could increase

The part of M3 exclusive to that aggregate declined 3 1/2 percent on a fourth-quarter-to-fourth-quarter basis, held down by a steep drop in institution-only money market mutual funds. Overall, M3 velocity rose at a 4 1/2 percent annual rate in 1993, down almost 2 percentage points from the previous year.

Monetary policy report to the Congress

In the early 1970s, when volatile stock market conditions along with persistent inflation reduced the attractiveness of bond and equity funds, the industry created money market mutual funds. These funds met the desire of investors to benefit from money market rates, which were then above the level that federal regulation allowed depository institutions to offer on retail accounts, and the success of these funds spurred the development of other funds investing in fixed-income securities: Municipal bond funds were introduced in the mid-1970s, and mortgage-backed and government bond funds were started in the mid- 1980s.

Recent trends in the mutual fund industry

M3 contracted slightly in June and July, owing in part to a substantial drop in institution-only money market mutual funds, whose returns had not kept pace with the increase in money market rates in late spring.

Minutes of the Federal Open Market Committee Meeting of August 17, 1993

Inflows to bond and stock mutual funds have reached record levels, and, to the extent that these inflows have come at the expense of growth in deposits or money market mutual funds, the broad monetary aggregates have been depressed.

Statement to the Congress

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