To choose the best money market fund, consumers must first learn what they are and how they work. A mutual fund is an entity that pools and invests money from many different investors, lowering the risk taken on by any single investor as well as the minimum investment required. Money market funds are mutual funds that invest only in securities that represent a low amount of risk. In comparison to other mutual funds, money market funds are typically lower risk; however, they are not risk-free investments. Additionally, a money market fund is not insured as a money market account, a type of bank account, would be.
Money market funds typically focus on government investments, certificates of deposits, and other investments that are low risk and can be sold quickly and at a fair price. Shares in these funds usually maintain a price of $1.00 US Dollars (USD) per share. The yield on these funds may fluctuate, however, and if a fund's investments perform much worse than expected, the per-share rate may fall as well. As such, it's possible to lose money with these funds, though losses are less likely to occur than with some other types of mutual funds.
When choosing the best money market fund, investors should compare investment amount requirements to find one they can afford. Some funds may require a significant initial investment, although others allow investors to open fund accounts with relatively little money. There are also some that allow investors to set up automatic monthly investments that are withdrawn from a checking or savings account, eliminating the need for the investors to remember to invest regularly.
Though money market funds are considered relatively safe, choosing the best money market fund means considering the types of investments a fund makes. Treasury and government funds are often considered among the safest funds, as long as the government itself is stable. For some people, tax-free funds, which are exempt from certain taxes, prove good investments as well. Generally, choosing the best money market fund means selecting a fund with a level of risk you can afford to take and the highest possible yield.
No matter how attractive a money market fund seems, it's important to perform due diligence before investing in it. This means carefully reviewing its past performance as well as its projections for the future. It may also prove helpful to research the fund manager, his experience, and his past performance when trying to choose the best money market fund.