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Money market mutual funds
Money market mutual funds | Alena Ozerova/Shutterstock.com

Money market mutual funds

How they're valued: Money market mutual funds -- also known as money market funds or MMFs -- are a saving and investing option offered by banks, brokerages and mutual fund companies. MMFs are regulated by the Securities and Exchange Commission, or the SEC, and are required to invest in short-term debt securities, such as certificates of deposits and U.S. Treasury bills. The funds have historically tried to maintain a share price of $1, but there's no guarantee a fund will be able to maintain the share price.

RATE SEARCH: Compare money market account and savings rates at Bankrate.com today.

Risks: The U.S. Securities and Exchange Commission prohibits the average maturity of fund investments from exceeding 90 days. Restricting investments to such short terms helps reduce risk to the investor by protecting them from major rate fluctuations that may occur over longer periods. Interest rates can vary, so there's no guarantee of how much you'll earn from month to month. Further, there's no guarantee that the share price will remain stable at $1 per share. If the share price dips below $1, you could lose some of your principal. When a money market fund is unable to maintain a $1 NAV, it's known as "breaking the buck." This very rarely happens, although it has occurred recently as a consequence of the credit crisis.

When investors redeem shares in money market funds, they are repaid at the fund's NAV calculated on the day the investors place the redemption order. Moreover, since money market funds are technically securities, they normally are not FDIC-insured, although some funds are temporarily protected.

Liquidity: Money market funds, like money market accounts, often provide check-writing and money transfer privileges for shareholders.

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