The Risks Inherited When Opening A Mutual Fund Money Market Account

Over the years, money market funds have gained in popularity as a useful money management tool. Known more as low-risk, low-yield investment, it’s more of a tool that can be used to park money and enjoy a modest rate of return. However there are some risks associated with a mutual fund money market account, and while they are minimal, they are still worth looking into. Money markets operate on the premise that money is essentially being loaned back and forth for the short term. Money market funds invest the money that you put into it, and then pay you monthly with dividends earned by the fund manager. Since a money market account fund is short term in nature, the risk is limited in that money invested for a longer term has a greater chance of something happening to it where it won’t get paid back.

Money market funds are limited by the Securities and Exchange Commission to only include investments that mature in less than 13 months, and the average length of time for investments in a money market account fund cannot average a maturity of more than 90 days. Generally, US Treasury notes, city and municipal bonds, commercial paper and CDs are typical types of investments in a money market account. As previously mentioned, the risks are minimal, but they are there. Interest rates for money market funds are variable, so while one month could see a nice return dividend, the next month could be lower, obviously meaningless earnings. Another important fact to consider is when interest rates in the financial sector are low, so too are the rates for money market funds. Rates for money market funds generally shadow that of Federal Reserve rates given to banks for overnight loans. In slower economic times, the Federal Reserve generally lowers the prime lending rate to banks to encourage borrowing, and the interest rate for a managed money market account takes a hit as well.

When interest rates start to creep back up again in better economic times, and the Federal Reserve eases their manipulation of the rates, money market account rates also tend to rise. Every mutual fund company and brokerage that offers money market funds have a prospectus, so it behooves an investor to check out several different funds and reading the prospectus in order to determine which money market fund makes better financial sense in the long run.