Chapter 11. Money Market Funds: Beating the Bank

In This Chapter

  • Distinguishing money market funds from other mutual funds

  • Choosing the right fund for you

  • Getting a glimpse of the best money market funds around

Back in the days when Richard Nixon was President, folks had hundreds of alternatives for safely investing their spare cash — they could schlep around and shop among banks, banks, and still more banks. Although it may seem that safe-money investors had many alternatives, they really didn't. As a result, yields weren't all that great compared with what a large institutional investor with millions of dollars to invest could obtain by purchasing ultrasafe short-term securities.

Then in the early 1970s, money market mutual funds were born. The concept was fairly simple. The money market mutual fund invested in the same safe, higher-yielding financial instruments (which I discuss in the section "Grasping what money funds invest in," later in this chapter) that only those with big bucks could buy. The money market fund then sells shares to investors who don't have vast sums to invest. By pooling the money from thousands of investors, the fund offers investors a decent yield (after charging a reasonable fee to cover the operational expenses and make a profit). In their first years of operation, these "people's" money funds had little cash flowing in. By 1977, less than $4 billion were in money market funds. But then interest rates rose sharply as inflation took hold. Soon, bank depositors ...

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