What is a Money Market Fund?

In my recent article about how to start an IRA with $1 in 15 minutes, I said that you would be putting your money into a money market fund. I thought I should explain in more detail what this is for those of you who decided to go this route, so that you are informed about and comfortable with where your money is. And for those of you who may have shied away from opening your IRA because you didn’t know what a money market fund was, let this be your last excuse!

A money market fund is a type of mutual fund that is legally required to invest in low-risk securities including government securities, certificates of deposit, commercial paper of companies, and other highly liquid and low-risk securities. It is similar to a high interest savings account in that it returns about the same amount of interest and is considered to be just as safe and stable.

A money market fund should not be confused with a money market account at a bank. While a money market account at a bank (or any other type of account at a bank) is covered by federal deposit insurance (up to $100,000), the money you put in a money market fund is not insured. Despite what you might initially think, though, that doesn’t really mean it’s less safe. It is technically possible to lose money in a money market fund, but it is rare. Jonathan of My Money Blog recently did the research on this subject, and he learned that the Investment Company Act of 1940 protects the money you invest through brokerage firms such as Vanguard or Fidelity.

Barring some sort of major disaster that none of us could adequately prepare for, your money is actually more at risk if you don’t save it and don’t invest it. Inflation and taxes whittle away the value of your money over time, so it’s important to invest in tax advantaged accounts (like IRA’s and 401k’s) and earn an interest rate that, at a bare minimum, keeps up with inflation (historically, about 3% a year).

To learn more about money market funds straight from the horse’s mouth, check out this page on Fidelity Cash Reserves.

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3 Responses to What is a Money Market Fund?

  1. disneysteve says:

    Thanks for this post. I have used a money market mutual fund for years and I often have to explain why I chose something non-FDIC insured. They are really just as safe and sometimes more convenient because you can have check-writing privileges with some of them.

  2. Amy F. says:

    Sometimes you can only write checks over a certain amount. With Fidelity, the check has to be for at least $500. I find this can be good for paying those occasional large bills (like insurance) if you have more money in your money market account than in your checking account. Of course, if you’re using the money market account as a savings account, you’ll want to replenish that money later.

  3. N Lewis says:

    Re: Money Market fund
    I bank in Canada at President’s Choice bank, a subsidiary of CIBC. While CIBC pays next to nothing on savings, without $5000 min. PC pays 4% from $1.00 up ! That’s only 4 cents but still as you go up that is higher than nearly every other bank here for those amounts. Also can access the bank machine either at Loblaws group of food stores or thru a regular CIBC machine at no charge.
    Good rate and available when needed. 90% of cash money stays in savings till needed and NO MER, even if small on a mutual fund!
    Thanks for letting me put in my 2 cents.

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