savings

4 basic money market funds to invest in

Money market funds have the advantage of giving you the flexibility of a checking or savings account, but with a bigger bang for your investment in the form of higher interest rates. It's a relatively safe investment, but you still should know your options before pouring money into these funds.

Not all money markets funds are the same

There are four basic types of money market funds you can invest in: U.S. Treasury funds, U.S. government and agency funds, diversified taxable funds and tax-free funds.
  • U.S. Treasury funds. These offer lower yields than other types of money market funds, but also offer the lowest risk. If you have a low risk tolerance and don't mind the lower yield, these funds are for you. They are tax exempt.
  • U.S. government and agency funds. These funds are a little riskier than a U.S. Treasury fund, with a slightly higher yield, but not much more. These funds invest in bonds and notes in the Federal government agencies, which are guaranteed by the Treasury and Congress. Some of these funds may invest in foreign securities, emerging market securities and mortgage-related securities. These funds are tax-exempt.
  • Diversified taxable funds. These are riskier, but higher-yielding, money market funds that keep your money in U.S. corporations' and foreign companies' commercial paper. Some of these funds will invest assets in deposits issued by foreign banks. These funds are taxable.
  • Tax-free funds. These are the riskiest of the four mutual fund types. They are a bit more complex because they invest in short-term, tax-exempt securities of local and state governments. Some of these funds don't go outside of a single state; all these funds pay income that's free of federal taxes. These funds are best for investors in a higher tax bracket and/or those who live in high-tax states. To see if these funds would be beneficial to you, check out Bankrate's tax equivalent yield formula.

Which to choose? Even risky money market funds are safer than stocks. Talk to your broker or banker to find out which is the best for you.

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