The assessment of money market mutual fund rates is most accurate when one has a solid understanding of the underlying money market instrument. The money market is a term for the collection of borrowers and lenders who work with very short term loans, up to 90 days. The interest rates are more favorable for both lender and borrower when compared to loans obtainable at big banks.
Investors enter the picture in two ways. The first is that they may put money into a money market account at a conventional bank. The bank pools the customers’ money together to buy into the money market, and takes a small cut. Investors investing their money this way get a well-defined return over time but do not have control over the underlying security.
A second way to get into the money market is to buy money market mutual funds. This can be accomplished by starting an account at a brokerage. The brokerage will use the pooled money to set up shares of money market instruments. Investors make money from both appreciation in the price of the shares as well as dividends from regular payouts.
It is not so hard to get access to a money market account at a local branch of an interstate bank. Approach and inquire about details on returns and deposit minimums before signing any forms. Accounts are likewise guaranteed in the event of a bank collapse by the FDIC.
Money market funds usually do not have wild swings. Consider the GNMA, Freddie and Fannie Mac funds. All three are in charge of property borrowing but Ginnie Mae funds are thought to be the most conservative. Readers will recall in the last few years Freddie Mac and Fannie Mae got pounded in the real estate crash of 2007 and 2008. Despite this, Ginnie Mae got through the crisis and possibly is in a vastly superior position.
Bond funds usually pay out a bit higher but are more volatile. Giant corporations and governments need to carry debt so as to realize day-to-day activities until sufficient tax is amassed to repay the borrowed money. Individuals, corporations and even foreign countries buy bonds issued by the U.S. government on account of historical performance and robustness of the United States markets.
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