A Money Market Fund is an open-end mutual fund and is also called a principal stability fund. By law, these funds are required to be invested in low-risk securities. The money market funds have low risk when compared to mutual funds and they also pay dividends.
Investor losses with money market funds are known to be relatively very rare. They invest only in short-term (can be anywhere from one day to one year) money markets such as certificates of deposits, government securities etc. The goal of money market funds is to keep the principal intact and earn as much dividend as possible. The net asset value remains constantly at $1 per share but with fluctuation of the interest rates.
Since money market funds are liquid investment, most financial institutions store money that they have not invested, in these funds.
These are not federally insured as the money market accounts are, but the risk is extremely low, but definitely not to be ruled out.
These funds are invested in instruments that provide a fixed return and with short maturity, the average date of maturity for any market fund being 90 days as this limits the volatility of the fund.
The initial investment in a money market fund is low and this allows a wide range of investors to invest in them. Similar to money market instruments, money market funds offer their investors settlement on the same day.
Money market funds can be taxable as well as tax-free. Any return from a taxable fund is subject to taxes and they may invest on a wide range of funds. Tax-free funds are non-taxable but they are also invested in a smaller range of funds and earn lower returns.
For those customers that have money in liquid accounts earning next to nothing, some of it can be invested in a money market fund, as the interest rates are as high as 4.5%. These accounts can be set up for as less as $1000 and even checks can be written, although there may be a minimum amount requirement for checks, around $250 or so.
As a customer, with money market funds, the choice is yours, either to opt for low risk investment or invest in it yourself if you have the confidence. If investing in a money market fund, the investor is advised to check all funds to see how secure they are and what they offer.