What Are The Money Market Funds Advantages And Disadvantages?
A money market fund serves as an investment with the objective to earn interest for investors along with sustaining a net asset value (NAV) of $1 per share. The portfolio for money market funds consists of securities of high-quality, monetary instruments or liquid debt. An investor can invest in money market funds for a short term or for maximum one year through mutual funds, brokerage firms or banks. When investing funds, everyone is careful to not lose money. A person needs to estimate the return on investment versus the amount of risk involved in it. Being safer, money market funds are a healthier option. Money market funds advantages and disadvantages are explained below in the article.
Table of Content
- 1 Money Market Funds Advantages And Disadvantages
- 1.1 Advantages
- 1.2 Disadvantages
- 1.3 Conclusion
Money Market Funds Advantages And Disadvantages
1. A safe place to keep your money in case of a volatile stock market.
Many times, investors are not sure whether to invest their money during uneasy stock market or not. This is where money market funds come to rescue. Money market funds are less risky than stocks and bonds and therefore, considered a better option by many. Money market funds are known to invest in low-risk fields like Treasury Bills, Certificates of Deposit and short-term commercial paper. A money market funds often provide returns in single-digits only but can still prove better when markets are down.
2. Money market funds and liquidity go hand in hand
Money market funds mostly invest in entities and investment vehicles that are in high demand like T-bills. They also avoid securities that trade fewer quantities and with lower demand. This gives room to liquidity, allowing investors to buy quicker and sell easily.
Presenting a clearer picture, shares do become highly liquid during good stock markets. However, things don’t always turn out to be in investor’s favor as the market fluctuates or falls.
3. A Safe bet
Securities and Exchange Commission handles the regulation of money market funds, giving it the needed safety. The fact that money market fund has a diverse range of underlying assets ensures that it offers safety against any kind of loss. This is boosted by the number of financial instrument that falls in different regions of the market.
1. With time, spending power is hit severely
Inflation can hit an investor’s spending power quite strongly. If the return of money market funds is not able to keep up with the inflation, it is actually depreciating the investor’s bank account.
2. Annual fees can “chew-in” the returns
If an investor is gaining a return of 2%-3% in a money market fund, a small fee levied can reduce the profit to a great extent.
3. Loosing better investment opportunities
Given a period of time, the stock market tends to return nearly 8-10% on investments. However, investing in money market funds, generally, yields not more than 2-3%. This leaves a room to invest in better opportunity fields and make all the possible difference.
The money market fund is full of opportunities. But every investment in any of the investment vehicles needs a proper understanding of that vehicle. In the end, the choice is all yours as it is you who know your investment capabilities better than anyone else.
Wells Fargo provide excellent opportunities to its customers. You can avail them by opening an account there. However, you need to know your Wells Fargo routing number.