Money Market funds - Why Is it Safe Investment?

The economic uncertainty has shaken the market beyond any reason and it is hard to estimate what funds or investments will give you certain gains. During these hard times it is quite a task to make the right investment plan that is risk-free and at the same time help you make profits. In order to know if a Money market fund will generate gains you need to first understand what the fund is all about.

What is a Money market fund?

Money market funds are attractive because they possess lower risk. These funds are open-ended mutual funds that invest purely in the money markets and they are normally short-term investments and have features of a debt fund that expires in a year or less than a year. The main aim of this kind of fund is to generate interest for the shareholders. And many off such funds invest government securities for instance treasury bills and commercial paper. The money market funds are ideal for large financial institutions and an individual investor can enter the fund through a wide range of securities. Your investment matures in a short period of time and these funds are also called cash investments.

Functions of a Money market fund

The main function of the Money market fund is to protect the principal amount. The NAV or the Net asset value is constant; $ 1 for each share, which does not change in order to simplify accounting but the interest rate, tends to move up and down. The fund involves large sums of money unlike the stock market. And generally these funds are liquid that are used by financial sectors, which store the money that is not yet invested. The funds have low risk and are insured by private companies.

Advantages:

The low risk factor is the biggest plus point of a Money market fund and your principal amount is well secured. The funds are liquid and thus considered to be the safest options of investment.

Disadvantages:

Although the fund is popular for its safe option feature. The fund can still not perform well though the chances are bleak. One of greatest drawbacks of the fund is very less returns but you can be assured of the principal amount that will be safeguarded. And one of the risks of the fund is inflation that can possibly alter the return and thus crumble the buying power of the investor’s cash. Because the fund is based on conventional principles and they are less profitable.