Money Market – Money Market Investments?

25.04.2013

A “money market investment” refers to the funds that financial institutions, including banks, invest in short term debts to government and top rated companies. The idea is to insure utmost security of funds, though the return is quite modest.

Prospects:

The average yield of money market investments varies from 2-5 percent per annum. This humble return is because the funds are invested in short-term traditional debts. Typically these are invested in securities like papers, certificate of deposits, treasury bills and such debt obligations for small periods of time.

Benefits

The most helpful feature of “money market investment” is that your investment has relatively low risks. But that doesn’t mean you would never lose your money, though the chances are very rare. You stand to lose your money if the company you choose for the purpose of investment goes broke.  If the rate of interest falls lower than the rate of inflation, money markets can’t find buyers. Generally, investments in money market are not insured by FDIC, meaning investors are basically dependent on the quality of the investments of their funds. Investors also have the option of investing in money market mutual funds, which again are not straightway guaranteed by the Treasury, but these funds primarily comprise of Treasury bills and government securities which are guaranteed by the government. So, investors get indirect guarantee from the government, which won’t default on paying these debts under normal circumstances. Another benefit of such investments is that such investments are considered open ended, meaning that investors can add or withdraw funds at any time without, paying any penalty.

Significance

Since long money market investments have continued to be among the safest forms of investments. They form the most widely accepted form of securities for holding surplus cash for short periods. Money markets frequently attract gains from bonds, stocks, mutual funds and other investments.

Function

A “money market investment” demands larger amounts as initial deposits, compared to savings bank accounts.  The usual minimum amount needs to be $1000-$5000 and it has to be maintained at all times. That is what makes it all the more worthwhile to invest in money market through money market mutual funds. A mutual fund company collects money from investors and invests in the kind of securities already mentioned. Any money market mutual fund would try its best to keep its share price constant at one dollar. It means for every dollar that money market fund collects, it has to issue another share of the fund at dollar one. So, investor is sure to get back $1 as long as the fund keeps working in that manner. Investors also earn interest on shares held from the investments made by the fund.

Considerations

Investors should note investments in different money market funds are not the same as different funds opt to invest in diverse securities, resulting to different rates of interest payable to investors. That makes it imperative to evaluate the performance of different funds. Though past performance of a fund doesn’t guarantee future returns, it is a reasonably good yardstick for measuring the performance of a money market fund. Also, there is a frequent change in the rates of interest.

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