Money-market funds also offer several features designed to help investors manage their cash reserves. Most offer limited check-writing privileges. It doesn't take much to start out, either. Many money-market funds have low minimum investment requirements.
Why not just stick with a bank? Money-market funds often pay as much as a percentage point more than banks' money-market accounts do. You'd get even less interest than that if you stashed your cash away in a checking or savings account.
There's a minor catch: Unlike consumer bank accounts, money-market funds are not FDIC insured. That means that the government won't step in if something goes haywire and your money-market fund loses money.
However, that danger is minimal. Money-market funds are regulated by the Securities and Exchange Commission, which enforces strict limits on the types of investments that these funds can make. Thus, it is unusual for a money-market fund to "break the buck," or fall below its $1 net asset value.
Unusual -- but not unheard of. For instance, during the credit crisis of 2007, reports indicated that some money market managers were holding stakes in problematic securities, including so-called SIVs (structured investment vehicles), which took a hit amid the market turmoil. But even in cases such as these, the funds' parent companies typically step in to support the funds, and no investors lose money.
Investors can take the safer route by choosing a money-market fund that invests exclusively in the direct obligations of the U.S. government. The drawback is that these funds typically pay out less income than those investing in corporate debt, too.
Choosing a money-market fund doesn't have to be hard.
- Go bargain-hunting. There's little that a money-market fund manager can do to improve yield and returns, so low-expense funds have an edge.
- Find a package that works for you. Check-writing privileges and minimum investment requirements vary from fund to fund.
- Start close to home. If you have a brokerage account, check out the associated money-market funds. But don't assume that the money fund that your money automatically gets swept into is the best deal. It's worth shopping around within your account's options.
- Check out iMoneyNet's money fund site. It has tons of information on yields and more hints for choosing a money-market fund.
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