Are money market funds equity or fixed-income?
A money market fund is a fixed income fund. It holds only short-term, liquid, high quality securities and maintains a lot of liquidity. It's a regulatory designation, there are specific requirements it must meet to call itself “money market” in the US.
Money market mutual funds, also known as money market funds, are fixed-income mutual funds that invest in high-quality, short-term debt.
Equity markets offer higher expected returns than fixed-income markets, but they also carry higher risk. Equity market investors are typically more interested in capital appreciation and pursue more aggressive strategies than fixed-income market investors.
Money market accounts are savings accounts that often offer higher interest rates than regular savings accounts and often incorporate checking account features, like easy access to cash. Yet they can also have downsides: Many have minimum balance requirements and excessive fees.
Money market funds aren't risk free
While money market funds typically invest in lower-risk assets, experts say it's important to know the funds aren't risk free. “It's a rarity that such funds lose value,” said CFP Randy Bruns, founder of Model Wealth in Naperville, Illinois.
The money market is a subsection of the fixed income market. We generally think of the term "fixed income" as synonymous with bonds. In reality, a bond is just one type of fixed income security.
- Vanguard Federal Money Market Fund (VMFXX)
- Vanguard Treasury Money Market Fund (VUSXX)
- Schwab Value Advantage Money Fund – Investor Shares (SWVXX)
- Schwab Treasury Obligations Money Fund – Investor Shares (SNOXX)
- Fidelity Money Market Fund (SPRXX)
- Fidelity Government Money Market Fund (SPAXX)
Money market funds can protect your assets during a recession, but only as a temporary fix and not for long-term growth. In times of economic uncertainty, money market funds offer liquidity for cash reserves that can help you build your portfolio.
We found that the median money-market fund returned 4.2% over the past year, compared with 0.49% annualized over the 10 years before 2022.
Fixed-income investing is a great way to earn consistent investment income and reduce risk. Investments such as bonds, CDs, and money-market funds can help diversify your portfolio and protect your capital when the market fluctuates.
Why should I invest in fixed-income?
Fixed income investments generally carry lower risk than stocks. They also function well as a way to generate income or value from your investments on a consistent basis.
- Tips for Living on a Fixed Income. March 1, 2023. ...
- #1 Do Not Accumulate Debt. It is better to enter retirement debt-free. ...
- #2 Have a Fixed Budget. ...
- #3 Pay for Necessities First. ...
- #4 Expect the Unexpected. ...
- #5 Invest In An Annuity.
Money market accounts tend to pay you higher interest rates than other types of savings accounts. On the other hand, money market accounts usually limit the number of transactions you can make by check, debit card, or electronic transfer.
The Bottom Line. Both money market accounts and money market funds are relatively safe, low-risk investments, but MMAs are insured up to $250,000 per depositor by the FDIC and money market funds aren't.
Some money market accounts come with minimum account balances to be able to earn the higher rate of interest. Six to 12 months of living expenses are typically recommended for the amount of money that should be kept in cash in these types of accounts for unforeseen emergencies and life events.
Money market funds seek stability and security with the goal of never losing money and keeping net asset value (NAV) at $1. This one-buck NAV baseline gives rise to the phrase "break the buck," meaning that if the value falls below the $1 NAV level, some of the original investment is gone and investors will lose money.
There is no direct way to lose money in a money market account. However, it is possible to lose money indirectly. For example, if the interest rate you receive on your account balance can no longer keep up with any penalty fees you may be assessed, the value of the account can fall below the initial deposit.
Money market accounts are considered safe, low-risk investments. They earn interest and allow for easy access to your money. Your balance is also FDIC-insured, so it's unlikely that you'll lose money. However, fees and interest rate changes could deplete your returns.
There are two main types of liquidity risks faced by money market funds: funding liquidity risk (if the fund's liquidity is insufficient to meet redemptions) and market liquidity risk (if market volatility forces funds to sell securities below the mark-to-market price in order to meet large redemptions or maintain ...
The biggest downside of investing in T-bills is that you're going to get a lower rate of return compared to other investments, such as certificates of deposit, money market funds, corporate bonds or stocks. If you're looking to make some serious gains in your portfolio, T-bills aren't going to cut it.
Should I invest in bonds or money market funds?
Short-term bonds typically yield higher interest rates than money market funds, so the potential to earn more income over time is greater. Overall, short-term bonds appear to be a better investment than money market funds.
Which bank gives 7% interest on a savings account? There are not any banks offering 7% interest on a savings account right now. However, two financial institutions are paying at least 7% APY on checking accounts: Landmark Credit Union Premium Checking Account, and OnPath Rewards High-Yield Checking.
If you're saving for something you'll need the money for in less than three to five years, saving in a money market fund may make sense for you. Money market funds are ideal for short-term saving because they invest in highly liquid securities with the objective of capital preservation and income.
Types of Money Market Funds
Government funds must invest 95.5% of their assets in government-issued securities and consequently are extremely safe. Municipal money market funds invest in municipal bonds issued by municipalities and municipal agencies, which pay interest exempt from federal income tax.
- Advantages of money market accounts often include high yields, liquidity and federal insurance for your funds. ...
- Disadvantages of money market accounts may include hefty minimum balance requirements and monthly fees — and you might be able to find better yields with other deposit accounts.
