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 (see caveats, below).
Liquidity: Money market funds, like money market accounts, often provide check-writing and money transfer privileges for shareholders.
Pros and cons: Money market funds, like other mutual funds, can be bought or sold at any time. They typically pay investors a monthly dividend. Yields usually are competitive with savings accounts. However, expect money market funds to provide lower returns than riskier investments such as stocks, which means inflation and fees can eat away at your returns over the long run. Also, earned interest may be subject to income tax, depending on whether the fund invests in taxable or tax-exempt securities.
Where to find them: You can buy money market funds at brokerage houses, mutual fund companies and some banks.
Caveats: Money market funds were widely believed to be ideal places to "park cash" before the current financial crisis prompted a mass exodus from money market funds into Treasury securities and cash equivalents. The U.S. Treasury Department announced a temporary stopgap program to protect shareholders if the funds are unable to maintain a $1 NAV. The program is voluntary (institutions have to agree to participate and pay a fee) and only covers shares held in a money market fund as of Sept. 19, 2008. Any additional shares purchased after Sept. 19 are not guaranteed. Eligible financial institutions had until Oct. 8, 2008, to enroll. Individual investors cannot enroll in the plan, so it's important to contact your fund sponsor to see if the fund participates in the program. The temporary money market funds guarantee program is scheduled to continue through Sept. 18, 2009.
Words of caution: "Money market funds have always been and are currently very safe investments with or without the Treasury guarantee program. Since the introduction of the Treasury guarantee program, the mutual fund industry has been working to help permanently enhance the safety and liquidity of money market funds through the Investment Company Institute's Money Market Working Group. The group formulated new regulatory and oversight standards designed to further strengthen money market funds and help protect investors through investment-related recommendations, which include prescribed liquidity, maturity and quality parameters. It is important for investors to understand the fund management policies and procedures utilized by the money market funds that they are investing in." -- Scott Donaldson, investment analyst with Vanguard's Investment Strategy Group, Valley Forge, Pa.
T-bills, Treasury notes, Treasury bondsHow they're valued: Treasury bills, or T-bills, are short-term debt instruments the U.S. government issues to raise money to pay for projects and pay its debts. Maturities of T-bills range from a few days to 52 weeks.
T-bills technically are not interest-bearing. They are sold at a discount from their face value but when they mature, the government pays you full face value. For example, if you buy a $1,000 T-bill for $980, you would earn $20 on your investment.