The deal: Offered at brokerage firms and some banks, money market mutual funds are uninsured, short-term investments in relatively low-risk securities such as U.S. Treasury bills and bank certificates of deposit.
The risk: Potential loss of principal.
While money market fund investors aim to maintain a balance that never dips below $1 per share, these funds are not FDIC-insured. The SEC's new rules for money market funds establish a greater degree of protection for your money, but falling rates can lead to money market fund losses.
The reward: Monthly dividend payouts with interest rates that are typically higher than savings accounts. Some money market funds are also tax-exempt, which leaves the IRS out of the equation.
"Historically, the average money market fund has out-yielded the average bank deposit account by over 1 percentage point," says Robert Litterst, portfolio manager of Fidelity Investments Money Market Funds.
Litterst says money market funds offer other benefits such as check-writing privileges and readily available cash via ATM access. When rates rise again, money market funds can provide a competitive alternative to other low-risk account options.
Banks, brokerages and mutual fund companies offer money market mutual funds.