Whether you’re planning for retirement or simply looking for ways to increase your personal wealth, diversifying and exploring all your options can take your savings to the next level. You might have a regular savings account, and perhaps a certificate of deposit or an individual retirement account. But why stop here? There are several savings vehicles available to you. Plus, the more accounts you have, the faster you can grow your nest egg. For this matter, you may look into money market funds, which is a type of mutual fund that invests in short-term securities.
If you’re not familiar with money market funds, you may understandably question whether they’re a safe investment. Money is hard to come by, thus is pays to use investment strategies with the least amount of risks.
1. Safe investment.
Like your bank savings account and certificates of deposits, money market funds are one of the safest types of investments. This option might work if you prefer to stay away from riskier investments, such as the stock market. These funds invest in low-risk vehicles. Thus, they almost always generate a return for investors – even in a bad market. Granted, returns in a bad market are lower, but something is better than nothing.
When exploring your investment options, consider whether liquidity will be an issue. Some vehicles don’t allow easy access to funds, and if there isn’t a demand, it can be difficult to sell. This isn’t the case with a money market fund. These accounts primarily focus on high-demand securities, which can result in a guaranteed return. And due to the high demand of these securities, money market funds are much easier to trade and sell.
3. Return vs. Inflation.
Although safe and an excellent way to increase your personal savings, the return on money market funds are often less than the return on common stocks. The stock market can yield returns as high as 10 percent, yet many money market funds only offer returns between 2 percent and 3 percent – a big difference.
The lower return may not be a huge deal, as you may prefer to yield on the side of caution. But even if you can live with less cash, there is another issue at hand – inflation. You may open a money market fund to supplement your income. However, the return on your investment may not be able to keep up with the cost of living. Sure, you may earn a 2 percent return on your investment. But this may not maintain your standard of living if the rate of inflation is 3 percent or higher..
4. Not FDIC-Insured.
Unfortunately, money market funds do not come with the same protection as other financial products. If you open a checking account, a savings account, a money market deposit account or a certificate or deposit, the Federal Deposit Insurance Corporation (FDIC) will insure your funds from loss – up to $250,000 per account. This isn’t the case with money market funds, as these accounts are not insured by the government. Thus, if the bank or brokerage firm that manages your fund shuts its doors, there’s a chance that you can lose your principal.