What is a Money Market Mutual Fund?
A money market mutual fund is not like a normal mutual fund. You don’t buy shares like you would an index fund or something similar. It is more like a savings account. Instead of buying shares, you just put whatever amount of money you want to put into it. If you have $100 you want to save, throw it in a money market fund, just like you would a savings account.
What are money market mutual funds made up of?
They contain short term debt instruments. Short term usually means six months or less. This type of fund contains short term debt instruments such as short term bonds that are constantly maturing. This is why you will not see a money market fund with a certain rate.
Money market funds report 7 day returns. For example, you might see a fund with a 7 day return of 3.53%. This is not how much you will earn in 7 days. For example, if you have $1,000 in a mutual fund earning 3.53%, you will not earn $35 in seven days. The rate is for over 1 year, so you would earn 3.53% divided by 365 times 7 which equals $0.0138. That is small, but over a year it would equal $35.
Why isn’t it the same rate all year?
The rate constantly changes because the fund in constantly earning different amounts. The investments are short term, therefore they are constantly maturing and new debt investments are being added at different interest rates.
By determining a 7 day return, investors can see how much they are earning and have a more accurate number than a year average.
Should you invest in a money market mutual fund?
A money market fund should not be used as a long term investment. It does not give a very high return for retirement or other investment goals. It is a good place to keep your cash. Often brokerage firms will keep your cash not invested in a money market account. You don’t exactly need investment software to put your money in a money market mutual fund.
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