Syndicate
Money-market Mutual Funds
Money-market funds compete directly with bank deposit accounts, and in years to come these will increase considerably at their own expense. Banks, brokerage firms, and investment companies offer money-market funds. However, many of the mutual funds from brokerage houses have higher fees besides sales commissions (loads).
Brokers and financial advisors are motivated to manage their funds away from the investment company’s money-market funds towards their own products, with which they benefit through the sales commission, also called loads.
For example, persuading you in investing in a short-term bond fund with a 2% annual performance before a money-market fund with 1% annual performance, which could seem a better choice in performance matters.
However, a short term bond fund is not the same as a money-market fund because the Net Asset Value (NAV) of a bond fund fluctuates, on the other hand a money market mutual fund?s NAV has a $1 fixed value per share. Besides operative expenses for these brokerage funds could be larger. It would take many years for a bond fund to compensate the load fee only to equal the amounts of the invested funds in the no-load money-market fund. The investment companies offer a larger amount of money market mutual funds, which provide a more effective option for cash and short-term funds than the higher-risk stock and bond investments.
The investment companies that manage money-market funds form a pool with the investors’ money so as to later issue shares for their investors. Then, the managers of the fund invest the money in short-term securities such as treasury bills, commercial papers, bankers’ acceptances, CDs, euro-dollars, repurchase agreements, and government agency obligations.
There are three types of money-market funds:
- General-purpose funds, which they invest in a wide range of money-market securities such as treasury bills, commercial papers, bankers’ acceptances, CDs, repurchase agreements and short-term offshore securities.
- US Government Funds which they invest in short-term treasury securities and the US agency obligations.
- Tax-exempt money market funds which they invest in short-term municipal securities (the income from these securities is exempt from federal income tax).