Money market funds are low-risk investments sponsored by investment fund companies. They are a type of mutual fund, making them a low-risk, fairly liquid way to invest your money. Money market funds don’t appreciate much, however, and returns are dependent on interest rates. As a result, they typically aren’t a viable option for long-term investing or wealth building.

Think of a money market fund as a secure place to hold your cash. You might invest in a money market fund before making a larger investment or a major purchase.

In this brief guide, our financial experts will share their tips about investing in money market mutual funds. Read on to learn the facts about this safe and stable investment opportunity.

Learn more about the top mutual funds to invest in.

When you invest in a money market fund, you are investing in cash-equivalent, debt-based assets. These are also called short-term debt instruments.

Examples include:

• Certificates of deposit (CDs)
• Commercial papers
• U.S. Treasuries
• Bankers’ acceptances
• Short-term government securities

Financial experts consider this type of investment “low-risk, low-return.” While you are unlikely to lose much, if any, money, interest and appreciation are minimal. However, money market funds may offer better returns than traditional bank accounts. Overall returns are dependent on the current interest rate.

Like a bank account, investors can withdraw their funds from a money market fund at any time. However, there may be a maximum number of withdrawals permitted before the fund’s date of maturity.

No. While their names sound alike, money market funds and money market accounts (MMAs) are distinct. A money market account is a type of savings account that offers high interest rates. You may also hear them referred to as money market deposit accounts (MMDAs). They are an alternative to traditional savings accounts for those looking to grow money they don’t need on a day-to-day basis.

MMAs and money market funds are similar in that they offer a place to “park” your money. However, money market accounts may be more stable and safer than money market funds.

Prime money market funds are also called general purpose money market funds. They invest in short-term obligations, usually issued by financial institutions. They may also invest in short-term private instruments.

As these are not government investments, they require the investor to take on some additional risk. In exchange, these funds may come with slightly higher yields compared to government funds.

Government funds are required to hold U.S. Treasury securities and certificates of deposit. You might also be investing in government-sponsored enterprises or Treasury collateralized repurchase agreements. However, these investments are not issued or guaranteed by the U.S. government or treasury. These tend to be the most stable, low-risk money market funds available.

Municipal funds are debt issued by local government entities, such as states and towns. Interest is generally exempt from the investor’s federal and state income taxes. You might also hear these referred to as tax-exempt market money funds.

The benefits of money market funds include:

• Safety and security: Money market funds are generally safe. They provide a low-risk place to “park” your money before making a larger investment or purchase.
• Higher yields: While not guaranteed, money market funds potentially offer higher yields than savings accounts.
• Easy liquidation: Money market funds are meant to be short-term investments. It’s fairly easy to liquidate your funds for cash.

You might choose to invest in money market funds if:

• You need your savings to hold their value over a short period of time. For example, you need to park your funds right before a major event like a wedding or birth.
• You need an accessible and stable place to maintain an emergency fund.
• You want stable, accessible funds for paying larger regular expenses, such as taxes.

Investing in money market funds is similar to investing in stocks. Interested investors must buy shares from fund providers, brokerage companies, or a mutual fund firm. You will need to open a brokerage account with the institution of your choice. Often, you can manage your account online or through an app.

Some money market funds may require a minimum initial investment to begin. Know how much you wish to invest before you move forward.

From there, you can decide which type of money market fund you wish to invest in. Keep your risk tolerance in mind and pay attention to the interest rates and potential yields to make the wisest choice. Once you decide, all you need to do is place an order.

Once you have made your investment, use your brokerage account to monitor its growth. These are short-term investments, however, and don’t require much active monitoring.

Those interested in investing in money market funds should also consider the following low-risk, short-term investment options:

• High-yield savings accounts: A savings account with a highly competitive interest rate with a stable and predictable return.
• Certificate of deposit (CD): A deposit account offered by banks with a fixed date of maturity. Upon reaching the date of maturity, investors receive the full value of their funds plus interest.

Raisin works with partner institutions that offer the above savings products at the most competitive rates available. You can manage your savings accounts and CDs in one place using a simple and convenient account. Explore products on Raisin and begin investing today.

The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.