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Chapter 11. Mutual Funds > Money Market Funds

Money Market Funds

Money markets have been interesting funds to follow for the past several years. With the markets in turmoil during 1999–2002, people were fleeing traditional equity funds and flocking to money market funds. Money market fund (MMF) assets rose steadily from $1.6 billion in 1999 to $2.3 billion in 2001, and then people began to look at their yields. After comparing the yield to that for fixed annuities and short-term bond funds, many people moved away from MMFs and these alternative investments. In 2003, yields on MMFs dropped to less than .50 percent, and the equity markets came back after three horrible years. At this point, people continued pulling money out of their money market accounts and invested in the equity markets. MMFs include the following:

  • Taxable money market funds. These invest in short-term, high-grade money market securities and must have an average maturity of 90 days or less. These funds seek the highest level of income consistent with preservation of capital (i.e., maintaining a stable share price).

  • Taxable money market funds—government . These funds invest primarily in U.S. Treasury obligations and other financial instruments issued or guaranteed by the U.S. government or its agencies.

  • Taxable money market funds—nongovernment.. These funds invest primarily in a variety of money market instruments, including certificates of deposit from large banks, commercial paper, and bankers' acceptances. In other words, they are all very safe, short-term investments.

  • Tax-exempt money market funds. These funds invest in short-term municipal securities and must have an average maturity of 90 days or less. These funds seek the highest level of income—free from federal and, in some cases, state and local taxes—consistent with the preservation of capital.

    Be Careful

    Money market funds offer a safe haven when you want an alternative to equities or bonds. Be careful, though; in low-interest-rate environments, you can actually lose money invested in a money market fund if the fund management fee and expenses exceed the credited rate. Check the prospectus because some funds may waive fees under some circumstances.


  • National tax-exempt money market funds. These funds invest in short-term securities of various U.S. municipal issuers.

  • State tax-exempt money market funds. These funds invest primarily in short-term securities of municipal issuers in a single state to achieve the highest level of tax-free income for residents of that state.


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