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Mutual Funds: Money Markets

Some things will never be considered sexy, even though they serve a perfectly useful role in our society: Neck braces, car batteries, C-Span. You can add money market funds to that list. (A note to thrill seekers: There will be no promises of huge market gains that create newly minted millionaires, so try to stay awake as you read on.)

Money market funds are a variation on a savings account. The good news is that these funds are virtually risk-free -- you'll only gain low to mid-single-digit returns, but you won't lose money. Plus, they typically allow you to write checks drawing from the money in your account for no charge. The bad news is you don't get to brag about your money market fund's returns to your friends who own a biotechnology fund that just doubled during the past six months (although, if your friend's biotech fund plunges 50%, you may have bragging rights.)

Money market funds invest your money in secure, short-term corporate and government debt such as 13-week Treasury bills and certificates of deposit, or CDs. What do you get in returns? Well, you get your money back for starters, plus whatever interest is earned from the fund's relatively short-term investments.

So, money market funds may make sense for investors who think the stock market won't match the modest returns these funds offer over a certain time period, although trying to time the market isn't necessarily the best strategy. These funds are a natural fit for older investors who just want to make sure they can preserve their nest egg, while returning modest gains. They also are a safe place to sock away some cash that you plan on using in a few months, say, for a mortgage. Further, some financial advisers suggest keeping a small portion of their holdings -- say, less than 15% -- in a money market fund.

Investors can opt for either a tax-free or taxable money market fund. It sounds like a no-brainer, but there are other differences to consider. Taxable funds typically invest in debt offerings that provide a better rate of return, or yield, than tax-free funds. But, you have to pay taxes on any earnings you make on the investments. Tax-free funds, meanwhile, invest in short-term municipal bonds and other debt offerings that are typically exempt from federal and sometimes state taxes.

More Unbridled Unsexiness

Since money market funds are a sizable part of the mutual funds arena, keeps abreast of the latest developments. To find out more, check out this unsexy but perfectly useful article:

Where Can I Park My Money for Nine Months?

Tracy Byrnes is an award-winning writer specializing in tax and accounting issues. As a freelancer, she has written columns for and the New York Post and her work has appeared in SmartMoney and on CBS MarketWatch. Prior to freelancing, she spent four years as a senior writer for Before that, she was an accountant with Ernst & Young. She has a B.A. in English and economics from Lehigh University and an M.B.A. in accounting from Rutgers University. Byrnes appreciates your feedback; click here to send her an email.

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