What’s a money market fund?
Banks offer them. So do mutual fund companies. But what exactly is a money market? And is it a suitable investment for your IRA or 401(k) account? Understanding the purpose of money market funds (MMFs) and factors to consider can help you decide.
Overview of money market funds
Money markets are often viewed as enhanced checking accounts that may pay higher interest. And while that’s essentially true for money market accounts offered by banks and credit unions, it’s not the whole story for money market funds.
MMFs are low-risk funds that strive to maintain a price of $1 per share while paying steady interest—although, there’s no guarantee that the price won’t fluctuate. To provide higher interest rates, MMFs typically invest in very short-term, high-quality bonds and bond-like investments issued by either the government or corporations.
Benefits of money market funds
There are a few reasons why you might consider investing a portion of your retirement savings in an MMF, including to help:
- Diversify your account—Having a mix of investments can help you weather the ups and downs of the financial markets and help keep your retirement goals on track.
- Preserve your money—Because of its goal of price stability, you might shift some of your savings to an MMF as your retirement draws closer to help you manage market downturns.
- Build your savings while evaluating other investment options—Some retirement savers use MMFs as a temporary parking place—a way to help earn interest while they decide what they want to invest in. Once they decide, they may transfer the money from the MMF to the other funds.
Drawbacks (risks) of money market funds
But before making any decisions, you’ll also want to consider the potential downsides.
- Less opportunity for growth—Unlike stock and bond funds, MMFs are designed to help preserve, not grow, your retirement savings. So if you put a significant portion of your savings in an MMF, it may take longer to reach your retirement goals.
- Not tied to inflation—The interest you earn in an MMF may not keep up with rising prices, making it harder for you to maintain your desired lifestyle in retirement.
You may want to consult with a financial professional to help you determine if an MMF is suitable for you and how much money to consider putting in it.
Choosing a money market fund
Deciding to use an MMF is just the first step. Next, you have to select a fund. For your 401(k) account, the choice is usually straightforward, as most plans offer only one MMF. Even so, you should still read the fund’s prospectus and fact sheet to make sure you understand its objective, fees, and potential risks.
With IRAs, you can choose an MMF from any IRA provider you want. Once again, you’ll want to review the prospectuses and fact sheets to help you decide. This is another situation where you may want to work with a financial professional. They can help you evaluate and compare different funds.
Be an informed retirement saver
Selecting the investments for your retirement accounts can be tough, especially if you don’t have much investing experience. But you’ve taken an important first step by learning the basics of MMFs. Keep building your understanding and take advantage of the resources offered through your IRA or 401(k) to help you make the most of your retirement savings.
For complete information about a particular investment option, please read the fund prospectus. You should carefully consider the objectives, risks, charges and expenses before investing. The prospectus contains this and other important information about the investment option and investment company. Please read the prospectus carefully before you invest or send money. Prospectus may only be available in English.
Important disclosures
You could lose money by investing in a money market fund. Although the fund seeks to preserve the value of your investment at $1.00 per share, it cannot guarantee it will do so. The fund may impose a fee upon sale of your shares or may temporarily suspend your ability to sell shares if the fund's liquidity falls below required minimums because of market conditions or other factors. An investment in the fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The Fund's sponsor has no legal obligation to provide financial support to the Fund, and you should not expect that the sponsor will provide financial support to the Fund at any time. Please see the fund’s prospectus for additional risks.
Diversification does not guarantee a profit or eliminate the risk of a loss.
This material is for informational purposes only and is not intended to be, nor shall it be interpreted or construed as, a recommendation or providing advice, impartial or otherwise.
It is your responsibility to select and monitor your investment options to meet your retirement objectives. You should review your investment strategy at least annually. You may also want to consult your own independent investment or tax advisor or legal counsel.
The content of this document is for general information only and is believed to be accurate and reliable as of the posting date, but may be subject to change. It is not intended to provide investment, tax, plan design, or legal advice (unless otherwise indicated). Please consult your own independent advisor as to any investment, tax, or legal statements made.
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