Definition: A money market fund is a type of mutual funds that invests in short-term securities, such as US Treasury Bills and other high quality, liquid investment types.
The money market fund objective is to earn interest for shareholders while maintaining a net asset value (NAV) of $1 per share. The most appropriate use for a money market fund is for short-term needs, such as emergency funds or for savings objectives with time horizons of less than one year. Money market funds are not best used for long-term savings strategies, such as education savings or retirement.
Best Money Market Funds and Highest Rates
Investors can typically buy money market funds at mutual fund firms, brokerage firms and banks. Vanguard Prime Money Market (VMMXX) and Fidelity Cash Reserves (FDRXX) often have among the highest yields for the larger, well-known financial institutions.
Savers and investors can find some of the highest yielding money market funds in the nation at Bankrate.com.
When to Use Municipal Money Market Funds
In general, it is always best to use a taxable money market fund in a tax-deferred account, such as an IRA or 401(k). This is because yields on taxable funds are generally higher than tax-free funds.
If the saver wants to us a money market fund in a taxable brokerage account, and depending upon the saver's tax bracket, it can make sense to use a municipal money market fund, which are usually tax-free at the federal income level.
To determine if using such a fund is wise, a saver can use tax-equivalent yield. For example, if a tax-free municipal money market fund has a 1.00% yield and the saver is in the 25% tax bracket, they would use this formula to determine if they should use the tax-free fund:
Tax-equivalent yield = Tax-free yield / (1 - your federal tax bracket)
1.00% / (1.00 - 0.25)
1.00% / 0.75
1.33% = Tax-equivalent yield
Therefore, if the saver could not find a yield in a taxable money market fund higher than 1.33%, they should use the tax-free money market fund.
Disclaimer: The information on this site is provided for discussion purposes only, and should not be misconstrued as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.