Money market funds offer a low risk way to invest in stocks, bonds, and other investment opportunities. They’re an excellent choice for people who are looking to meet short-term financial goals, build an emergency fund, or retire. However, there are certain things to consider before investing in a money market fund. You should always conduct independent research before making a decision. You should also keep in mind that past performance of investment products is no guarantee of future results.
Money market funds are regulated by the Securities and Exchange Commission and must invest primarily in short-term debt securities. These funds have historically tried to maintain a $1 share price. Only twice have they fallen below that mark. If you’re unsure of what type of fund you need to invest in, check the prospectus and read up on the fees.
Another important aspect of a money market fund is its ability to maintain a constant net asset value. Often, a money market fund tries to keep its net asset value (NAV) at $1 and declares a daily dividend equal to its net income. When the NAV falls below $1.00, it’s considered to have “broken the buck.” This is a common risk that a money market fund faces.
While money market funds are low risk, investors looking for higher yields should consider a bond fund or balanced fund. These two options are more risky than money market funds but offer a higher yield. These funds require less initial investment and maintain a low risk level. They are also less volatile than their counterparts.
Money market funds are regulated by the Securities and Exchange Commission (SEC). This means that they must be transparent about the risks involved, and maintain their benefits. They also have to report their NAV on a weekly basis. If it drops below the threshold, the money fund has to charge a liquidity fee.
There are three basic types of money market funds. These are municipal money funds, prime funds, and retail money funds. Their investments differ in their characteristics and distribution channels. For example, a Prime money fund invests in municipal and corporate securities. Its average maturity is short, which means that it’s a good choice for a short-term investment strategy.
Money market funds have a long history of maintaining a stable price per share. Vanguard funds, for example, are considered conservative. That means that they are expected to fluctuate only a little bit. The downside to these funds is that they are prone to income risk. They also typically produce lower long-term returns than riskier assets.
Another important factor to consider is credit risk. Credit risk is the risk that an issuer will be unable to pay interest and principal. This can affect a fund’s price if it suffers negative perceptions about the ability of an issuer to make payments.