Money Markets: What to know about low-risk investments

Money market funds have become a popular choice for investors seeking low-risk options to grow their savings while maintaining liquidity. These funds invest in short-term, high-quality debt instruments and are designed to provide stability and steady returns. 

In this blog, we’ll explore the concept of money market funds, explore the different types available, and discuss their potential advantages and disadvantages. Additionally, we’ll provide tips on how to evaluate these funds effectively, helping you decide if they align with your investment strategy.

Money Market Funds: What is it?

Investments in high-quality, short-term debt instruments, such as  government securities, municipal securities, and other securities like commercial paper, certificates of deposit (CDs), and repurchase agreements (repos), are made by money market mutual funds, also known as money market funds.

It's crucial to think about diversifying your holdings and comprehend any possible risks connected to a certain security, just like with other investments. The yield is the only return on investment for money market funds, in contrast to the majority of other mutual funds or exchange-traded funds, which seek to produce capital gains. The risk of money-market funds is comparatively minimal.

Generally speaking, money market fund prices often don't go through the same kind of volatility as stock values.

Money market fund types

Only securities with short maturities (usually 13 months or less) are permitted by law for money market funds to invest in. However, there may be some variation in the securities they invest in. Typically, funds are divided into three primary categories:

• Government: Put cash, government securities, or repurchase agreements secured by government securities at least 99.5% of the fund's total assets.One

• Municipal: Invest mostly in municipal bonds since they usually have yields that are not subject to federal income taxes.

• Prime: Invest in a range of taxable short-term assets, including commercial paper, repos, and bank and corporate debt securities.

Possible advantages

Strict maturity, credit quality, and diversification requirements apply to money market funds, making them a less risky option for investors who could be searching for something different from cash. On any business day, investors can typically sell their shares back to a money market fund at the NAV.

Additionally, because their income may be excluded from federal income taxes, certain municipal money market funds may provide benefits in taxable brokerage accounts. Other advantages include:

• Low-Risk and Short Duration

• Diversification

• Stability and Security

• High Liquidity

• Potential Tax Efficiency

Possible disadvantages

Although they are uncommon, money market funds have occasionally dropped below their $1 NAV, which has caused investors to lose some of their investment's principal value—a situation known as "breaking the buck." It is also possible for money market funds with fluctuating share prices to lose value.

During periods of market stress, money market funds may apply redemption restrictions or liquidity fees. It's crucial to remember that unlike CDs and other bank deposits, money market funds are neither guaranteed nor insured by the Federal Deposit Insurance Corporation (FDIC) or any other government organization. 

Other disadvantages include:

• Inflation Risk

• Expenses can take a toll

• Risk of Higher Yields

• Low returns means lost opportunity

How to assess money market funds

Investors may wonder, "Should I just invest in the fund with the highest yield?" when assessing money market funds. The quick answer is that, other than yield and past performance, there are a lot of other aspects to take into account.

• The net expense ratio, for example, shows what proportion of a fund's assets are used for management fees and operating costs.

• The initial investment minimum, which for retail funds can vary from a few hundred to several thousand dollars, is another thing that investors would want to consider.

Bottom line

Money market funds are less risky investments with little potential for financial gains but the ability to provide liquidity and income. When capital preservation is the main goal, money market funds might help offer a choice for investors with short time horizons. Additionally, head over to JS Bank because their money market fund is unique, and offers investors multiple features to ensure that fits with their own financial objectives.