During the late 1990s, money market mutual funds offered an annual return of around 5% (see graph). This made them attractive to investors, including retirees and pre-retirees who wanted to preserve principal while earning a modest return.
After an uptick just before the recession, yields on these funds have been near zero. Even so, at the end of July 2015, investors held more than $2.6 trillion in money market funds — about one-third held by individual investors and the rest by institutional investors.1 What’s the appeal, considering such a low return? In two words: stability and liquidity.
Money market funds are mutual funds that invest in cash-alternative assets, usually short-term debt. They seek to preserve a stable value of $1 per share and can generally be liquidated fairly easily. Money market funds are typically used as the “sweep account” for clearing brokerage transactions, and investors often keep cash proceeds in money market funds on a temporary basis while looking for another investment. The funds can also be useful to hold emergency funds.
However, for long-term investing, money market funds are a questionable choice. You might keep some assets in these funds to balance riskier investments. But in the current low-interest-rate environment, the value of money market funds may be eroded by inflation, so you might lose purchasing power along with the opportunity to pursue growth through other investments. Of course, this could change if interest rates rise.
Money market funds are neither insured nor guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although money market funds seek to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in such a fund.
Mutual funds are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.
1) Investment Company Institute, 2015
The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright 2016 Emerald Connect, LLC.