When it comes to investing in money market mutual funds, your mindset will be a bit different than investing in stock or bond funds. That’s because the objective of these funds is not to make big profits. Instead, their goal is invest in very safe securities that will preserve the capital you put in and make it very easy for you to get the money out quickly.
As I’ve mentioned elsewhere, money market mutual funds invest in very safe securities such as Certificates of Deposit, Treasury bills, and Commercial Paper. There are three instances where you might want to seek the comfort offered by these funds:
1. Temporary parking spot – You may be faced with a situation where you’re not sure of the best place to invest your money. The stock market could be gyrating beyond your comfort zone. And while bonds are a little safer than stocks, you may not be prepared to lock into them. Plus, there might not be a lot of ready and willing buyers for your bonds when you’re ready to sell them.
2. High liquidity – This just means that when you’re ready to pull your money out of the fund, it’ll happen very quickly. That’s because investments such as Treasury bills are always in high demand, unlike many corporate bonds, for example.
3. Rising interest rates – In our history, there have been times where the stock market was stagnant and market interest rates in the economy were rising. Of course, rising market interest rates mean that bonds will be trading at a discount. So if the stock market and bond prices are both falling, money market funds and instruments begin to look pretty darn attractive.
In the remainder of this article, I’m going to walk you through how to invest in money market mutual funds. If you already have an online brokerage account at TD Ameritrade, ETrade, or one of the others, you’re good to go. If not, take a few minutes and open an account. It’s very simple.
Now let’s quickly go over an example of how to invest in a money market mutual fund.
Money Market Mutual Fund – Details
For this walkthrough, I’ve chosen the Fidelity Select Money Market Portfolio fund. Its trading symbol is FSLXX. There’s nothing particularly special about this fund. It was just the first one that I found.
First, here’s a snapshop image (to the right) that shows key aspects of the Fidelity Select Money Market Portfolio fund, followed by their meaning: Source: Fidelity.com
NAV – This stand for Net Asset Value. It’s the price you’ll pay to buy one share of the fund. It’s calculated by dividing the total net assets by the total number outstanding shares. For money market funds, the objective in to keep the NAV to $1.00.
Near the bottom of the snapshot you’ll see Net Assets of $5,101.96 million. This translates to approximately 5.1 billion outstanding shares.
7-Day Yield – Over the last 7 days, this fund has earned a profit of .01%. This ain’t much. But keep in mind that the goal of this fund is not to make big profits. If you want a super safe investment, you should expect super low returns.
Weighted Avg Maturity – This is the average number days before the principal on the investments in the fund must be paid and then reinvested by the fund. So the number “58 days” let’s you know that these are short term investments. But this measurement is not important unless you’re thinking of investing hundreds of thousands or millions of dollars into the fund and are concerned about market interest rates.
Exp Ratio – This is the expense ratio percentage. It the amount that is paid from the fund to cover annual operating expenses (e.g., salaries, administrative, etc.). So for this fund, the ratio is .30%. This means that your share of the expenses would be $3 per $1000 invested. Even though we’re not talking about big money, this percentage still seems a little high. I think a number around .20% would be more in line with other similar funds I’ve seen.
Minimum to Invest – To get into this fund, you need to have at least $2,500. This amount can vary between funds.
Money Market Mutual Fund – Performance
Below is a snapshot that shows how the Fidelity Select Money Market Portfolio Fund has performed over the last 10 years. For example, over the last year, it has made a profit of .02%. That’s nothing to write home about. My only concern would be whether (or by how much) the low return is eating into my principal (original investment amount).
It would be nice to see this the annual percentages at least match the Expense Ratio.
But again, unless you’re investing many thousands of dollars, we’re not talking about a lot of money.
Wrap It Up
As you can see, there’s nothing mouth watering from an investment standpoint about money market mutual funds. But if must use them, look for the following three elements:
Capital preservation – If you put $10,000 into the fund, you should get at least $10,000 out, even after fees and expenses.
Features – Some funds offer check writing, wire transfer redemptions, etc. You may want this flexibility.
Low fees – Look for funds that have expense ratios of .20% or less.
That’s it. Now you know how to invest in money market mutual funds. Just remember that they aren’t meant to be long term investments for most investors. Use them for the short term qualities they offer, but get back into the real game as soon as you find the right investment.
Mutual Fund Guide Conclusion
I hope that you found the information about mutual funds in this guide to be helpful. Their role in growing your wealth cannot be denied. In fact, I recommend that you read through this guide a second time.
Understand all of the advantages of mutual funds and how they can make you money. By learning about basic concepts such as fund appreciation, dividends, capital gain, and net asset values, you’ll put yourself in a position to make confident decisions.
But, also, don’t invest your money without knowing all of the costs and fees involved. Mutual fund companies have gotten very slick about downplaying expenses in their marketing and sales material. This is just one of the reasons why you should read the prospectus for any mutual fund you’re thinking of investing in.
The prospectus is document or report that explains critical elements related to the fund such as fees, historical performance, objective, fund manager bio, holdings, and more.
Next, in order to ensure that your money is working in the most efficient and effective manner to deliver maximum returns, invest in stocks, bonds, or money market funds according to the Money Shifting Strategy discussed in section four.
Finally, be sure to do your homework when evaluating whether or not to invest in a specific fund. Examine all the key elements that I showed you, and compare the performance of multiple funds.
And when you make your final decision, commit to making consistent contributions to the funds every month, rain or shine. The best way to make this happen is to set up automatic transfers from your checking account to your investment accounts.
All the best,
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