Flexibility.
You can be as aggressive
or conservative as you
want with money market
mutual funds. "You can
find whatever level
of risk you want to
take," says Douglas
Borkowski, director
of the Financial Counseling
Clinic at Iowa State
University.
Higher earnings. There is the potential for a higher rate of return than with savings or money market accounts. While the money is not federally insured (as with a savings account), you are not risking the principal in return for a shot at greater interest.
Liquidity.
Money is often more
liquid with MMMFs than
with CDs or Treasuries.
You can usually get
at your money within
a few days.
Ease of use. You often can automate deposits.
No guarantee. You usually aren't guaranteed a specific rate of return. The interest rate you get will depend on the investments you select.
Opening minimums. You usually need a chunk of money to open one. Many have a minimum requirement to establish an account and many will require a minimum balance. But some institutions are becoming more competitive, hoping to catch consumers at a young age and have a customer for life. So if you want an account, keep looking.
More
fees. You have
to watch out for fees.
There are more types
of fees to watch for
with an MMMF. A couple
of terms to learn: load
(commissions associated
with transactions) and
expense ratios (account
management fees.) Shop
for an account with
a fee structure that
will best suit the way
you invest.
Protection.
Your money is not federally
insured, and, technically,
it's at risk. "Officially
it's at risk, but to
my knowledge, no one
has ever lost anything,"
says Barry Picker, partner
in Picker, Weinberg
& Auerbach CPAs. Usually,
the money is invested
in short-term securities,
similar to what banks
do on a regular basis,
he says.
Low liquidity. Money might not be instantly available. It could take a few days to retrieve your money if you need it.
Just
about everybody, says Douglas
Borkowski, director of the
Financial Counseling Clinic
at Iowa State University.
You get a rate of return
closer to a stock-type investment
without the stock-market-level
risk. Because it's less
liquid (and could return
some decent interest), it's
most effective for those
needs that are a few years
away, rather than the always-available
emergency fund or saving
for that big-screen TV you
want to buy in the next
few months.
That means the couple saving for a house in two or three years might be able to get a nice little dash of interest on their nest egg. And a college student who doesn't have a lot of extra cash can start putting a little away for after-college life.
Like CDs, you can also park money market mutual funds inside a tax-deferred account for retirement or college savings. And they continue to be popular with investors, as the low-risk, liquid part of a balanced financial strategy.
Trying
to figure out which options
best match your savings
strategy? Here are several
key points to compare and
contrast at a glance.
