As of November 2020, money market mutual funds account for nearly 1,000 of the more than 8,000 mutual funds available to investors. Even more impressive is the fact that money market assets account for around 20% of all mutual fund assets. That's nearly $4.35 trillion invested in money market funds alone.
By law, a money market fund is defined as a mutual fund that is required to invest in low-risk securities. This means these funds are relatively low-risk investments compared to other types of mutual funds. They also pay dividends to shareholders that are aligned with short-term interest rates.
Money market funds invest in assets like certificates of deposits, government securities, commercial paper of companies, and other low-risk, highly-liquid securities. Unlike other mutual funds, they attempt to keep their net asset value (NAV) at a constant $1.00 per share.
Don't confuse money market investing with money market deposit accounts found at local banks. For example, money market funds are not insured through the Federal Deposit Insurance Corporation (FDIC).
Even though money market funds are not insured, they are still considered very safe investments because the fund's holdings typically include securities like Treasury Bills sold by the federal government. Since the government has the ability to raise funds to cover expenses through taxes, the likelihood of default on a government security is extremely low. That's why many financiers consider money market funds a "safe" investment.
Just how safe are these investments? It is very likely that the U.S. government will pay all interest due on its bonds and bills. If the government were to stop paying on these obligations, U.S. citizens have bigger problems to worry about than the interest rate or dividend payment on a money market fund.
Money market funds are also considered very liquid investments. This means it's possible to take money out of an account on relatively short notice. There is also no penalty for taking money out of a money market fund, unlike banking instruments such as certificates of deposit (CD's), which can impose fees for early withdrawals.
Investors oftentimes take these desirable attributes into consideration and use the fund as a safe haven for money in-waiting between investments. For example, they're a great choice for anyone looking for a place to hold their money when saving for a big purchase like a new home or even college tuition. It's possible to earn a competitive rate of interest, and virtually eliminate the possibility of putting the principal at risk.
Money market funds provide the benefit of pooled investments, since individuals can participate in a more diverse, and higher-quality, portfolio than they could on their own. Like other mutual funds, each investor buying into a money market fund is considered a shareholder; a part-owner of the fund.
After yielding around 2.5% or higher for many years, money market rates are starting to lose the interest of investors. In 2020, interest rates were hovering around 0.85%. This makes them a far less attractive alternative to bond funds, which are providing higher yields.
We're going to finish up with a list of money market funds paying the highest interest rates in the United States (October 2020). These funds have been ranked in terms of their 7-day yield, which is the typical performance benchmark.
|Fund Name||7-Day Yield (%)|
|JPMorgan Prime MMF/Capital||0.88%|
|UBS Select Prime Preferred Fund||0.87%|
|Fidelity Inv Prime MMkt/Instit||0.86%|
|Morgan Stanley ILF/MMP/Inst||0.85%|
|BlackRock Liquidity: TempFund Inst||0.84%|
About the Author - Money Market Mutual Funds