Log InJoin 

Money Market Funds Bring Calm To Stormy Portfolios

It's hurricane season on Wall Street. As interest rates and oil prices go up,up,up, the Dow Jones and NASDAQ averages go down,down,down. Where can the average investor go to weather the storm? One safe harbor is the money market mutual fund. Money market funds offer stable per-share prices, liquidity and allow investors to benefit from a climate of rising interest rates.

Like most mutual funds, money market funds pool investor resources in order to purchase large quantities of assets, in this case, short-term treasury bonds and high-quality corporate debentures that pay interest monthly. These funds generally are no-load, meaning that investors pay no up-front fees to the fund; the fund makes its profit by levying management fees. The difference between the interest the fund earns less the fees is distributed to the shareholders. Currently, money market funds offer annual percentage rates between 3.85% and 4.80%, which is substantially better than that offered on most passbook savings accounts. Interest is calculated and paid monthly, and investors can either take the interest payments in cash or reinvest it in additional shares in the fund.

Unlike stock or bond mutual funds, the share price of a money market fund never changes. Every share is worth $1.00, and every dollar invested retains its value. This stability makes the money market fund very attractive to investors seeking safety as well as a good rate of return on their investment. Unlike a passbook account at a bank, these funds are not FDIC insured, but the probability of a well-managed fund going belly-up is very small. Money market funds are as safe as the treasury bonds in which they invest. The reward of owing fund shares far outweighs the risk involved.

Many conservative investors have already invested in Certificates of Deposit (CDs) at their local bank. Why would these individuals be interested in a money market fund? Unlike CDs, money market funds are liquid and investors can access their funds if their circumstances demand immediate cash. Investors don't have to commit their money to the fund for a specific length of time, and there are no penalties for withdrawing funds. Many money-market funds offer check writing privileges, making the fund an excellent place to store funds that an investor knows will be needed for big ticket purchases such as a down payment on a home, a new car, or funds for remodeling. Furthermore, the interest rate on a CD is locked in at the time the contract is written, but interest on money market funds fluctuates with the market. The interest investors earn is adjusted up or down each month after the Federal Reserve makes its decision concerning rates. Money market fund investors benefit from monthly interest rate increases.

Finally, money market funds are available to small investors. Many funds require a minimum investment of only $250.00, and MBNA, the parent company of PayPal, allows accountholders to earn money market rates on the funds they keep in their PayPal account by answering a few simple questions. The beauty of using PayPal as the entry to the money market is that investors can regularly transfer small amounts of money into the account on a regular basis; other mutual funds generally require additional investments to be in increments of $50.00 to $100.00. For lower-income earners who may not have 50.00 to invest at any given time, PayPal can still accommodate investments of $5.00 to $25.00. As in any investment, the key to success is consistency.

So, while an ill wind blows equity and bond investments hither and yon, dock investment dollars in a money market fund. The 4% interest may not be as glamorous as a 14% return on a mutual fund, but it sure beats worrying during those times when the Dow loses 900 points in two weeks.