Money Market - Types of Mutual Funds, Investing in Stock Markets Video Lecture | Investing in Stock Markets - B Com

although banks are convenient and safe
money market mutual funds and short-term
bond funds are good alternatives to what
the bank has to offer first let's
examine money market mutual funds they
can be thought of as a variant of a bank
checking account the main advantage that
money market mutual funds offer is
higher yields money market mutual funds
are investment companies that buy
short-term securities like 90 day US
Treasury bills large banks certificates
of deposit in short-term corporate debt
called commercial paper money market
mutual funds must invest in short term
securities so that the average maturity
of the portfolio cannot exceed 90 days
because of these short-term investments
money market mutual funds are virtually
immune from the interest rate risk that
haunts mutual funds that invest in
longer term bonds by law money market
mutual funds must invest at least 95
percent of their assets in either US
government securities or other
securities of the highest credit rating
thus money market mutual funds almost
can be thought of as being safer than
bank deposits money market mutual funds
do not enjoy the Federal Deposit
Insurance that banks have however this
deposit insurance is not the cure-all
that many think that it is for instance
if a bank folds the deposits in the bank
may be frozen for up to 30 days as long
as your deposit is under $100,000 you
eventually should get all of your money
back but that could take months also
when a bank fails you will get your
original deposit back but you may have
to give up some of the interest you earn
without the deposit insurance banks
would be riskier places for deposits
than money market mutual funds banks
take most of their deposits and lend the
money on either a long-term basis for
things like commercial real estate or
lend the money to high-risk borrowers
like credit card users or auto
purchasers
banks typically keep less than 20% of
their deposits in their vaults to pay
off depositors if enough depositors want
their money back
banks can't call their long-term loans
back to fulfill the depositors demands
when this happens the bank must merge
with someone or filed for bankruptcy
unfortunately this isn't a rare
occurrence in the 1980s over 800
commercial banks and 600 savings and
loans filed for bankruptcy money market
mutual funds are less likely to fail
because they invest in high-grade liquid
short term debt if lots of fund
investors want their money back the
mutual fund simply sells the high-grade
securities to the market and uses the
proceeds to pay off customer redemptions
in fact to date only one money market
mutual fund has lost money for its
investors and that was a strange fund
that was set up to invest for banks and
was closed to the public at large mutual
funds also provide another safety valve
that banks don't the securities that the
mutual fund purchases on behalf of
investors are stored with a third-party
custodian this third-party helps to
prevent the mutual fund management from
embezzling or otherwise misusing
investors funds still if you want
ultimate safety you should consider
investing in a so-called US government
money market fund these funds typically
place all their investments in
securities that are backed by The Full
Faith and Credit of the US government
even here you need to be a little
careful
beware of investing in so-called
government plus money market funds such
funds may invest in derivative
securities which are backed by US
government obligations such derivative
securities may have little credit risk
but they may have a good deal of
interest rate risk even if they are
short term securities the American money
markets are extremely efficient and any
fund that has a higher than average
yield is either run frugally or as
taking on extra room
be aware of what you're getting to avoid
nasty surprises in this kind of mutual
fund or any mutual fund make sure to
read the funds prospectus before
investing still for the most part money
market mutual funds provide higher
returns with little or no extra risk
compared with bank accounts they can do
this for two reasons
first banks must pay insurance premiums
to the FDIC to get the insurance
coverage for their deposits these
premiums increase dramatically after the
1980s higher insurance premiums mean
lower returns to you
second mutual funds tend to have lower
overhead than banks most large mutual
funds like Vanguard do not have a
nationwide chain of walk-in offices like
banks do with little invested in bricks
and mortar the mutual fund companies can
afford to pay higher interest rates and
still show a profit mutual funds also
cut their cause by leaving small
transactions to the banks typically you
must have one thousand dollars or even
three thousand dollars to open a money
market mutual fund money market funds
offer lots of services like check
writing electronic transfers and
automatic deposits and withdrawals but
checks usually have a minimum of two
hundred and fifty dollars because of
this you might want to keep a couple
thousand dollars in a local bank account
for everyday cash management and keep
your three to six month emergency
reserve in a higher pain money market
mutual fund money market mutual funds
also offer one product that banks can't
offer if you have a high income you
might come out ahead by investing in a
tax-exempt money market mutual fund if
you stay with a bank all of your
interest income is taxed