Chapter 7

Managing Money Market Funds


Understanding the risks and rewards of money funds

Selecting the right fund for your situation

Finding the best alternatives to money funds

For many years, folks kept their spare cash in a local bank, and for good reason. The local bank was convenient, offered safety and peace of mind with the government backing for money on deposit, and generally paid some interest on the money.

In the 1970s, however, the investment landscape changed for smaller investors. Interest rates and inflation increased, yet banks were limited by regulations in the interest rates they could pay depositors. Thus was born the money market fund.

In this chapter, I discuss the risks and rewards of money funds, uses for funds, and how to pick the best ones to help you meet your investing goals.

Defining Money Market Mutual Funds

Money market mutual funds began in 1971. They invested in the higher-yielding financial instruments that previously were accessible only to larger institutional investors with large sums to invest. Money market funds “democratized” these investments by selling shares to investors with relatively small amounts to invest. By pooling the money of thousands of investors, and after charging a reasonable fee to cover their operational expenses and make a profit, money market funds were able to offer investors a better yield than typical bank accounts.

Money market funds are unique among mutual fund company offerings because they don’t ...

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