Money market funds allow investors to limit risk while earning an attractive yield.
A money market fund is a type of mutual fund that invests in debt securities, specifically those characterized by short maturities and minimal credit risk. A money market fund generates income with little to no capital appreciation, making it a low-risk, low-return investment.
The vehicle offers investors high liquidity with very low risk (albeit more risk than cash). Because money market funds are mutual funds, it’s important to note that they are not covered by the FDIC’s federal deposit insurance.
The overall return from a money market fund is dependent on current interest rates, making the interest rate policy of the Federal Reserve a key driver for yield.
The Vanguard Federal Money Market Fund (VMFXX), the JPMorgan Prime Money Market Fund (VMVXX), and the Invesco Government Money Market Fund (INAXX) are each yielding around 5% in the current environment.