How to Invest in Money Market Mutual Funds: 10 Tips
Money market mutual funds have had a bad rap in recent years. Their low return, based on prevailing interest rates, have given them the image of an investment. This view is only marginally better than storing cash under the mattress.
But that image is unfair. Although their yields are relatively low, money market mutual funds bring with them considerable benefits for savvy investors. Understanding those benefits is crucial toward conducting an effective overall investment strategy, particularly if they are used in conjunction with stocks, bonds or other mutual funds.
The Basics of Money Market Mutual Funds
Money market mutual funds are compiled by portfolio managers at investment houses who generally invest the fund’s money in a variety of highly liquid short-term instruments, including treasury bills, treasury notes, and commercial paper. They are offered in shares of $1 and pay out monthly dividends. The dividends closely track prevailing short-term interest rates.
To invest in a money market mutual fund, select a large investment company in which you already have investments or one that you trust and ask them how you can invest in their funds. The process usually is straightforward. Many large investment companies offer a number of money market mutual funds, with each differing slightly from the others. Check them out and determine which will work best for your investment objectives.
10 Benefits of Money Market Mutual Funds & How to Use Them as Investment Strategies
1) When You Need to Avoid Risk
On rare occasions, such as during the 2008 crash, a couple of funds have dropped for a brief time below the dollar mark, but the objective of managers of money market mutual funds is to keep the shares at $1 each, and they generally succeed.
Although the amount paid out in dividends, or interest, can be low when interest rates are down and can vary from one fund to another, the capital itself is not exposed to the degree of risk that is common to almost all other mutual fund investments.
2) When You Need the Money to Be Available at Any Time
Unlike certificates of deposits in which money cannot be withdrawn within a set time period, such as a year, without penalty, money market mutual funds are highly liquid. The money can usually be withdrawn within a day or two.
Therefore, when it is essential that you have money available on which you can draw without it being exposed to a drop in value even for a short time, these funds offer an ideal place to keep it while earning dividends on it at the same time.
3) No Additional Charges
Most money market mutual funds do not charge any fees for depositing or withdrawing money. In contrast, many stock and bond mutual funds charge fees or loads.
4) Place to Park Your Money
When moving from one mutual fund to another, or when buying or selling stocks, many investors like to place their money in a fund between investments. A money market mutual fund is an excellent place to do so.
Ideally, investors may want to transfer assets to a money market mutual fund within the same investment company, making the transfer to another fund within the company easy.
5) Seek Out Higher Yields
Although the dividends paid on money market mutual funds might be relatively low, they do vary, and some can be higher than the interest available in, say, a bank checking account or even a bank savings account. Depending on the amount of money invested, the difference can be meaningful. This will happen especially if you invest a sum which is fairly high.
It makes sense, therefore, to seek out those funds that have been paying higher dividends and to select them for your investment.
6) Ride with the Wave
At a time when interest rates appear to be rising, most money market mutual funds will reflect the trend and their dividends will rise, too. This brings even greater benefits to investors. Of course, the opposite is true when rates are falling.
Investors might want to check the prevailing economic climate. Also, they might want to determine whether rates are rising or falling and gauge their investments accordingly.
7) Ideal Saving Vehicle
For those saving for a goal and wanting to invest systematically to achieve it, money market mutual funds are an excellent vehicle in which to do so. Many funds allow you to invest an amount each month.
Those investors will not have to worry about trying to buy in when the fund is low as might be an aim for those funds that vary in value on a daily basis and sometimes swing wildly in just a few days.
8) Added Benefits
Some funds offer the ability to write checks on the amount in the fund, making withdrawal easy. Others allow wire transfers to a bank account.
Other benefits are available, and investors should check out those that offer advantages that make sense to them.
Some money market mutual funds offer tax-free advantages. Investors for whom this is important might want to seek out such funds.
10) Dividends Can Be Reinvested
Most funds enable investors to select whether they should reinvest the dividends or pay them out each month. Should the dividends be reinvested, they will be used to buy more shares in the fund and they, in turn, will grow along with the other shares.
Use the Funds to Your Benefit
The best way to invest in money market mutual funds is to choose them as a vehicle for your specific investment goals. Should you be seeking stability of short-term cash, for example, as a way to park your money between investments, to save for a specific goal, or to have money available at a moment’s notice, money market mutual funds are an ideal investment vehicle to add to your portfolio.
Have you been using money market mutual funds to benefit your portfolio? Have you other advantages (or disadvantages) to add? We invite you to share your comments.