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Money Market Mutual Funds - Essay Example

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Money Market Mutual Funds

Money market funds are viewed widely as investments that are as safe as deposits in the bank that provide returns that are higher than those of bank deposits are. Money market funds often store money that at the time is not in current investment due to the funds high liquidity. In the United States, the first money market fund was the brainchild Henry B. R. Brown and Bruce R. Bent in 1971 in the form of The Reserve Fund. It offered investors an opportunity of earning small rates on their cash, preserved in the fund (Scott-Quin). The rates were paid out in form of dividends to the investors. Many more money market funds sprung up in the United States thereafter. The Investment Company Act of 1940 of the Securities and Exchange Commission deals with regulating the money market funds within the United States. The act contains guidelines that restrict the maturity, diversity, and quality of money market funds’ investments. A money fund buys the debt that is the highest rated with a maturity of less than thirteen months. A weighted average maturity of at most 60 days and a maximum of 5% investing for every issuer excluding repurchase agreements and securities of the government constitute the portfolio (U.S Congress 21). A FIDC insured account is an account in a bank involved in the FIDC program that has met the required standards needed for insurance by the Federal Deposit Insurance Corporation (FIDC). There are a number of account types that can qualify for this program, ranging from money market deposit and certificate of deposit to savings, NOW, and checking accounts. Deposits made in these accounts are FIDC-insured deposits and a maximum of $250,000 for every account is insurable by the FIDC. These deposits have some similarities as well as differences to the money market mutual funds. Both money market mutual funds and FIDC-insured deposits have high liquidity and flexibility levels (Garman and Forgue 154). Access of the money in the accounts in both types of investments is possible through making ATM withdrawals and writing checks whenever the money has needs. Money market mutual fund shares are redeemable at any time on a daily basis, though the fund may require a minimum account balance. The funds also often allow shareholders to write checks reflected on their individual account balances availing the use of shares for transactions. The FDIC insured investments, also known as money market deposit accounts give access to money in the accounts to the investors without charging penalties for early withdrawals. The two investments are both considered investment options with low risks. The accounts pay an interest rate that is higher than that of a passbook savings account (Thomas 208). In case the investment goes wrong, the FDIC, in the case of FDIC insured bank deposits, steps in and compensates for the loss in terms of insurance payments. Though it is not an investor’s right, if the money market mutual fund investment fails, there is a rare occurrence called “Breaking the buck” where the dividend per share paid to shareholders is the standard $1 per share with the losses covered . The key difference between these two types of market accounts is the insurance of the accounts. The Federal Deposit Insurance Corporation is a government agency that insures banks and bank accounts. Money market deposits in banks that ...Show more

Summary

Money Market Mutual Funds Money market mutual funds, also referred to as money market funds, are investment companies, which have open-end policies that only invest in money markets (Thomas 208). The investment is short-term and involves debt securities in form of commercial paper, United States Treasury bills, liquid assets, and certificates of deposits…
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