Money Market Fund Risks and Costs

Investing in a money market fund can be a good way to park your money in between larger investments. However, this type of investment carries with it some risks and costs. Here are a few things to consider about the risks and costs associated with money market mutual funds.

Money Market Funds

Money market mutual funds are the type of investment in which you can invest in a variety of securities within the money market. These funds will invest in United States Treasury securities, government-sponsored enterprises, commercial paper and other short-term debt instruments.

Safety

The big advantage of investing in this type of fund is the safety that it provides. These funds are considered one of the safest types of investment in the world. Most of the time, they put a large portion of the funds into government securities. Therefore, unless you believe that the government is going to default, you can trust that your investment is safe.

Low Returns

Even though these funds are considered safe, you are not going to be able to make much of a return. The returns from money market mutual funds are extremely low when compared to other types of investments. You might make only 1 or 2 percent from this type of fund. With this type of fund, it is going to be difficult for you even to beat inflation. In most years, inflation is going to be equal to 3 percent. If you put your money into something that is giving you 3 percent or less, you are not really getting anywhere. 

Expense Ratio

Another potential problem with these types of funds is that they have an expense ratio. You are putting your money into an investment that has professional management. A fund manager is in charge of making the individual investment decisions for the fund. Because of this, the company has to charge something to the investors. This is done in the form of an expense ratio. The expense ratio is taken out of the returns from the fund. This means that for every dollar that you are paying in expense ratios, that is one less dollar that you will be able to take out in profit. When you are dealing with such low returns in the first place, this can make the money market mutual fund a very poor investment.

When you are shopping for a money market mutual fund to put your money into, you will want to make sure that you take a look at the expense ratio that is charged. Every mutual fund has a different expense ratio, and you could potentially find one that is low and reasonable. When you do this, you will be able to hang onto more of your profits and have a much better experience with your money market mutual fund. When you are trying to beat inflation with low returns, you cannot afford to pay a high expense ratio. 

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