Different Money Market Funds Carry Different Risks

Money market funds can be a solid investment with minimal risk. However, these investments are not risk-free, and if you are planning on investing in them, you should understand the risks that are involved. Here are the basics of money market funds and what types of risks you can expect from the different funds that are available.

Money Market Funds

Most mutual fund companies offer some type of money market mutual fund to their clients. Many times, this fund is promoted as a way to allow your cash to earn a return while you are in between investments. With this type of fund, the share price is kept at a steady $1 per share in most cases. Money market funds invest in a number of different securities that make up the money market. Depending on what type of money market mutual fund you are investing in, you are going to be taking on a different amount of risk.

Types of Money Market Funds

There are many varieties of money market mutual funds for you to invest in. One type of fund that you could invest in primarily invests in United States Treasury securities. This means that they are putting money into T-bills and other similar bonds. 

Another type of money market fund invests in government-sponsored enterprises. This is one step below investing directly in the federal government. This is putting money into companies that are fully backed by the government. There is not a specific government guarantee on these investments, but there is an implied guarantee because the company is backed by the government.

Another variety of money market fund that you could invest in deals with corporate debt. Companies will regularly issue commercial paper in order to raise money for short-term projects. The commercial paper that is issued by strong companies is regularly included in money market mutual funds.

Risks

Investing in money market funds is going to provide you with varying levels of risk. When you are looking at a money market fund to invest in, it is important to understand the individual investment strategy that they use. When you invest in a money market fund that deals strictly with United States Treasury securities, you are not going to have to worry about that much risk. As long as you believe that the United States government is not going to go into default anytime soon, you should be fine with this type of investment. However, you are going to have to get a smaller return on your investment in most cases.

If you invest in a mutual fund that invests in government-sponsored enterprises, you are going to be able to get a low-risk investment as well. You may be able to get a slightly higher return on your investment as well.

If you invest in a money market fund that puts money into other businesses, you are going to be taking on a greater amount of risk. These money market funds rarely lose substantial amounts of money, but you should know that the companies could go out of business at some point.

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