Alpha Teach Yourself Investing in 24 Hours: An Analysis (part 20)

Mutual Funds (part E)

by

Charles Lamson

Money Market Funds

Money market funds are vehicles for investing in extremely short-term cash or cash equivalent instruments. They typically pay a higher interest rate than regular bank accounts.

A money market fund's value is a relatively safe place to park money temporarily awaiting investment or a pending expense. Its interest rates are not going to take your breath away, but it is better than a savings account.

Because the Securities Exchange Commission has tight regulations about where a money market fund invests its money, there is not much difference in interest rates. Look for funds that have low operating expenses, certainly below 0.5 percent.

Many stock mutual funds offer money market funds as part of their family of funds. They will often let you sell shares in one of their funds and sweep the money into their money market fund while awaiting reinvestment---as long as it is into another of their funds.

Most money market funds have a check-writing feature and other services that make it convenient to move money in and out of the account.

Money market funds also come in two flavors: taxable and tax-free.

Taxable Money Market Funds

Taxable money market funds invest in short-term corporate securities, bank CDs, and government-backed securities. Because of strict credit-worthiness requirements, money market funds are considered relatively safe investments.

Tax-free Money Market Funds

Tax-free money market funds invest in U.S. Treasury issues and are considered very safe because the "full faith and credit" of the U.S. government that backs the securities the fund buys. These funds are exempt from state income tax.

JUST A MINUTE Despite the appeal of tax-free income, most investors will do better in regular funds even if they have to pay taxes because the tax-free funds pay such low returns.

Other tax-free money market funds invest in short-term municipal issues, and if you live in the state where the instrument was issued, the dividends from the fund may be exempt from federal, state, and/or local taxes.

Money market funds are suitable for short-term situations where you know there is another purpose for the money in the near future. Whether you choose taxable or tax-free funds, consider alternative investment opportunities if the money is not earmarked for a specific use in the near future.

*ALPHA TEACH YOURSELF INVESTING IN 24 HOURS, 2000, KEN LITTLE, PGS. 148-149*

END

JUST A MINUTE

Despite the appeal of tax-free income, most investors will do better in regular funds even if they have to pay taxes because the tax-free funds pay such low returns.