Money market mutual funds are very conservative funds that invest exclusively, or primarily, in money markets. These guys are good at naming their funds right? If you aren’t familiar with money markets, they are essentially short term, very low risk investments that offer a great deal of security but don’t offer much in the way of return. They are ideal for investors who are looking for a small rate of return but only have a short period of time to invest and aren’t willing to take a large amount of risks with their investment.
With the best money market mutual funds the obvious advantage to money market funds is that they are relatively low risk investments but conversely they aren’t extremely profitable funds. I should point out that just because money market funds are lower risk than other mutual funds, they can and sometimes do lose money. That said if you are looking for a safe way to invest in mutual funds you should definitely look toward the money market funds. You may even be able to find tax free money market mutual funds depending on what company you invest with.
With the securities that make up the fund being of the short term variety, the composition of money market funds changes very rapidly. With treasury bills and other securities maturing in a year or less, fund managers are forced to make a lot of movement in the fund to keep up. Because of this you should pay extra attention to the fund makeup as time goes on and money market mutual fund rates change, because the fund you bought in to initially may have a different makeup one or two years down the line.
One of the disadvantages of money market funds is that they are not FDIC insured like certificates of deposit (CD’s) and offer a very similar rate of return. To compensate your issuing company probably boasts a higher rate of return (albeit a small one) that will lure investors in.
As with all other sorts of mutual funds you should also make sure that you be sure that the fees and expenses that your mutual fund company charges you don’t outweigh the rate of return for your mutual funds, otherwise you should just keep your money in the bank.