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What are Money Market Accounts?

Money Market funds are touted as the safest investments in the stock market, but what are they really? Money market funds operate differently than any other investment fund in the market. These funds are typically only invested in bank securities, the Federal Government, or large sized Grade A credit rated companies. When you invest in a money market fund, it is similar to putting your money into a FDIC insured savings account. Dividends earned are paid to investors, and this is how you increase on your principal investment. These funds have advantages for those looking for shorter term investments. They a liquefiable, meaning if you need the money quickly, you have complete access to it without penalty. Also, many funds offer the investor the ability to borrow against the principle investment. This offers the advantage of having an avenue of financial resource, should you need money quickly without emptying your fund investment.

Who Manages Money Market Funds?

Money market funds are managed by an array of investment firms. Some of these firms are large, well known giants, such as JP MorganChase. Others are smaller funds managed by individual investors and their firms. These management firms are paid based on the performance of their account. While money market funds are all invested in essentially the same areas of finance, they differ greatly in their operations. Some will specialize in more bank securities, while others may focus their investment capital on Federal Government bonds.

How to Choose a Good Money Market Fund

While there is no guarantee on anything invested anywhere in the stock market, there are tools you can utilize to choose the right money market fund. Researching a fund’s performance history is essential prior to investing in it. When deciding on a fund, look at its past performance history, key employees responsible for its management, and find out what others are saying about the fund you are looking at. While choosing a well known fund may seem like an obvious choice, many smaller ones perform equally well or better. Research is key before you invest. Know where you are putting your investment. This is a list of some well known, well-performing money market funds and some key statistics you should be looking for:

Vanguard Prime Money Market Fund (VMMX)

Current yield is 3.8%
Expense ratio is 0.30%
Average Maturity of Holdings is 36 days
$3,000 minimum investment amount required for General Non-IRA Account
Assets of $51 billion

Fidelity Cash Reserves (FDRXX)

Current yield is 3.16%
Expense ratio is 0.42%
$2,000 minimum investment amount required for General Non-IRA Account

Fidelity Select Money Market (FSLXX)

Current yield is 3.23%
Expense ratio is 0.39%
$2,500 minimum investment amount required for General Non-IRA Account
Assets of $617 million

Fidelity US Government Reserves (FGRXX)

Current yield is 3.16%
Expense ration is .35%
$2,500 minimum investment amount required for General Non-IRA Account
Assets of $2.3 billion

T. Rowe Price Prime Reserve (PRRXX)

Current yield is 2.94%
Expense ratio is 0.62%
$2,500 minimum investment amount required for General Non-IRA Account
Assets of $4.9 billion

Is a Money Market Account Safer?

Money market accounts are safer than investing in regular stocks, for several reasons. While it is true that you can lose your principle, the US Securities and Exchange Commission states that “While investor losses in money market funds have been rare, they are possible”. Only money market funds deposited into a bank, such as a savings account, are actually FDIC insured. However under new laws passed this past September, 2008, this insurance is being passed on to qualifying, regular money market funds.

How Much Can I Make?

While all investments are relative to the climate of the market, you make estimates based on market history. On average, a decent return is 3.0% annually on a money market investment. Suppose you had invested $2,500.00 five years ago, based on this percentage amount, your principal investment would have netted $404.00 in profit.

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