Money Market Investing as Saving Alternative When You Are In-Between Investments
Money market investing is in-between investment, which offers higher returns then classic saving account and is suitable for those who need access to their capital.
Money market investing is yet another popular choice to invest your money when you are in-between investments. Since they act as holding places for cash waiting to be invested, they are some of the most widely owned securities. You can choose among money market deposit accounts or money market mutual funds.
The short term debt obligations held in portfolios are usually from highly rated companies and government agencies, treasury bills, certificates of deposit and commercial paper, resulting in potential to make on average three to four percent per year. This modest rate of return is the result of their conservative investment strategy in short term debt obligations.
Money market investing can be useful for those who need access to their capital; investments are considered as open ended investments, meaning investors add and withdraw funds at any time without penalty. This is the ideal solution if you regularly invest because the funds can be used immediately to purchase stocks, bonds, or mutual funds.
Money Market Deposit Accounts
Deposit account is held by a bank, is FDIC secured and keeps its cash in short term debt obligations. This is done to insure maximum safety for the principal while providing a modest return. Since the account is not considered a transaction account, it is subject to the regulations on savings accounts: only six withdrawal transactions to third parties are permitted per month, only three of which may be paid by check. Banks are required to discourage customers from exceeding these limits, either by imposing high fees on customers who do so, or by closing their accounts.
Money Market Mutual Funds
A money market fund is offered by a mutual fund or brokerage, is not FDIC secured and is simply a collection of short-term debt investments held by that mutual fund. Fund mainly buys the highest rated debt, which matures in less than 13 months. The SEC requires the average maturity of investments in a fund to be less than 90 days and not invest more than 5% in any one issuer, except for government securities and repurchase agreements, which also serves to limit risk.
Money market funds differ by the type of debt they purchase. Government money funds invest in U.S. government and agency securities. Some government money funds are Treasury-only funds, while others buy a full range of government and agency securities. Corporate money funds invest in securities issued by businesses. Finally, tax-free money funds invest in securities issued by municipalities.
Advantages And Disadvantages Of Money Market Investing
- Depositing money is as easy as depositing cash into a savings account.
- Cash is immediately available for alternative investments.
- One of the benefits is the low risk to principle. It is possible to effectively lose money if the interest rate were to decline below the rate of inflation, because the invested money loses buying power in this case.
- Some financial institutions place a limit on the number of withdrawals in any given month.
- Money market investments require higher initial deposits than bank savings accounts, usually between $500 and $5000 and this is also the minimum balance that must be maintained.
- The rate of interest is directly proportional to the investor's level of deposited assets, not to maturity as is the case with certificates of deposit.
Should You Invest in Money Market Account or Money Market Fund?
The main thing to consider is your needs. If you don't need the options available from funds, just use a money market account. You should get a competitive return and you can sleep at night knowing that you're taking less risk. In addition, you should consider how much time and energy you're willing to invest. Money market accounts will be easier to find at standard banks, while for a money market fund, you may have to open an account with a brokerage firm or mutual fund company.
Written by: Goran Dolenc
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