For investors seeking safety, liquidity, and modest returns, money market funds are a popular option. Along with offering access to low-risk portfolios, they can provide the opportunity to generate income while maintaining access to liquidity. 

This article delves into money market mutual funds, how they work, and the options available. We’ll also explore how Gainbridge products provide alternatives that complement or even surpass money market funds in supporting long-term financial stability. 

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What is a money market fund?

Money market funds are a type of mutual fund that invest in a portfolio of short-term, high-quality debt instruments, such as Treasury bills, commercial paper, and certificates of deposit (CDs). 

There are three main types of money market funds: government, prime, and tax-exempt (municipal). Government funds typically hold Treasury securities and other government-backed debt. Prime funds typically invest in corporate debt, while tax-exempt funds focus on municipal securities, offering potential tax advantages. 

With their combination of accessibility and stability, money market funds are often used to hold emergency savings, down payments, and other short-term cash reserves. 

How do money market funds work?

Money market funds operate as a pooled investment vehicle. Investors purchase shares and fund managers use the combined capital to buy short-term, high-quality debt securities. A key advantage of this structure is liquidity — money market funds typically allow daily redemptions, making them well-suited for storing cash that may be needed on short notice. 

Their primary objective is to preserve capital while generating modest income. Most aim to maintain a stable net asset value (NAV) of $1 per share, with returns created through interest earned on the underlying securities and distributed as monthly dividends. Some money market funds, particularly prime funds, use a floating NAV, which may fluctuate based on market conditions. Although not FDIC-insured, money market funds may qualify for up to $500,000 in protection through the Securities Investor Protection Corporation(SIPC) if held in a SIPC member brokerage account and the firm fails. 

Money market funds are sometimes confused with money market accounts, which are interest-bearing deposit accounts offered by banks and credit unions. Money market accounts work similarly in terms of preserving capital and providing access to money but are FDIC-insured up to $250,000. This makes them an attractive option for more conservative investors. 

Money market funds: Pros and cons 

All investments come with trade-offs, and money market funds are no exception. Here’s a look at their key advantages and limitations.

Pros

High liquidity

One of the biggest advantages of money market funds is their high liquidity. Investors can usually redeem shares on any business day, with funds available within one to three days. This makes them a convenient option for emergency savings or short-term goals, like a home down payment.

Greater diversification

Since money market funds invest in a variety of short-term securities, they can offer some  diversification. Federal rules cap exposure to any non-government issuer at 5%, which can add a layer of capital protection compared to holding individual instruments. 

Potential tax-exempt income

Funds that focus on municipal debt can provide income exempt from federal, and sometimes state or local, taxes. These may be especially attractive to investors in higher tax brackets seeking to improve after-tax returns. 

Cons

Lower yield relative to inflation

The tradeoff for liquidity and low risk is lower returns. Money market funds typically offer modest yields that may not keep pace with inflation, especially during periods of rising prices. Over time, this can erode purchasing power and limit wealth-building potential. 

Possible liquidity restrictions

Under stress, money market funds may impose liquidity fees or temporary redemption limits. For example, if a fund’s liquid assets fall below 30% due to large outflows, it may charge up to a 2% redemption fee or suspend withdrawals. These measures protect remaining investors but can limit your access to cash. 

Investors looking for liquidity with predictable interest may consider pairing a money market fund with a fixed annuity from Gainbridge. These product can offer guaranteed income and protection from market volatility, complementing the flexible access of a money market fund with long-term financial stability.

3 money market funds often recommended

When deciding which type of money market fund is right for you, consider factors like yield and expense ratio. Here are three strong options that meet a variety of investment needs. 

Government 

Many investors consider government money market funds, like the Vanguard Federal Money Market Fund (VMFXX), among the safest options. These funds primarily invest in U.S. Treasuries and other government-backed securities, offering a stable NAV and minimal credit risk. VMFXX has no minimum investment requirement when used as a brokerage settlement fund and carries a relatively low expense ratio of 0.11%, making it appealing to more conservative investors. 

Prime 

Vanguard Prime Money Market Fund (VMMXX or VMRXX) is a prime money market fund that invests in short-term, high-quality U.S. and foreign corporate debt, certificates of deposit, and commercial paper. It offers the potential for slightly higher yields than government-only funds, though it comes with modestly higher credit exposure. 

Tax-exempt

Tax-exempt money market funds focus on municipal securities that may be exempt from federal and — in some cases, state — income taxes. These funds are particularly suited for high-income investors looking to improve their after-tax yield. They typically require a higher minimum investment, often starting at $3,000 or more. 

Strengthen your investment portfolio with Gainbridge

Fixed annuities can complement money market funds, offering guaranteed interest rates and capital preservation while helping support your long-term financial stability. With no hidden fees or commissions, Gainbridge’s innovative platform streamlines retirement planning. To learn more about optimizing your portfolio, explore Gainbridge today. 

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This article is intended for informational purposes only. It is not intended to provide, and should not be interpreted as, individualized investment, legal, or tax advice. For advice concerning your own situation please contact the appropriate professional. The GainbridgeⓇ digital platform provides informational and educational resources intended only for self-directed purposes. Investing involves risk, including loss of principal and past performance does not guarantee future results.