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Money Market Funds | Monthly Income Investments

Typically used as a short-term pitstop for capital between higher yield investments, money market funds are still a useful monthly income generating tool

David Garner
David Garner
Published On: August 2nd, 2021

Asset Focus: Money Market Funds

Money Market mutual funds are income-generating investment funds. They are typically used as a short term investment due to the low risk nature of their own investments. Today, we take a look a more detailed look at how money market funds work.

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What Are Money Market Funds?

Usually structured as a mutual fund or exchange traded fund (ETF), these funds invest in liquid assets with short-term maturities. For example, a money market fund might hold investments in cash and high-quality debt  such as US treasury bonds.

Money market funds typically invest in highly liquid low risk assets such as cash and treasury bonds

Because the funds’ investments pay interest, the fund manager will pay regular dividends to shareholders. These distributions can be tax free or taxable depending on the the funds’ underlying investments.

Because of the high liquidity, low returns and lack of capital appreciation, investors use this type of fund as a temporary short-term investment.

Here is a more detailed list of some of the assets a money market fund might invest in:

  • Certificates of Deposit
  • US Treasury Repurchase Agreements
  • Short Term Commercial Debt (Commercial Paper such a payroll financing etc.)
  • Bank Guaranteed Short Term Debt (Bankers Acceptances)
All of these assets are interest-bearing. So, the fund manager collect interest at the applicable rate and then distributes regular monthly dividends to shareholders.

Different Types of Money Market Fund

There are essentially 4 types of money market fund, each with a different investment mandate, and therefore different risk profile. Each type of fund investment in different types of assets with different maturity dates etc.

US Treasury Money Market Fund

Just as it sounds, a treasury fund invests in US Government debt securities. these include Treasury bills, bonds, and notes. Fidelity manage a US Treasury Money Market Fund called the Fidelity Treasury Money Market Fund.

Government Money 

Different to a treasury fund, a government money fund invests almost exclusively in liquid cash, government debt instruments, and repurchase agreements that are fully backed by cash or government securities. An example of this type of fund is the PGIM Government Money Market Fund.

Prime Money Market Fund

Prime money market funds – also called prime money funds –  invest in non-government short-term debt securities. These include corporate debt, Government agencies and government-sponsored enterprises (GSEs). According to this article by CNBC, some fund managers started to move their prime money fund assets into safer US-Government backed securities during the global Covid-19 pandemic in 2020.

Tax-Exempt Money Fund

These funds invest in tax-exempt securities such as municipal bonds. Depending on the exact nature of the underlying investments, distributions from these funds may be exempt from both Federal and State income taxes. You can find a list of the top 3 tax-exempt money market funds as compiled by Investopedia here.

Related: Municipal Bonds | Everything You Need to Know About These Tax Efficient Monthly Income Generators

How to Invest in Money Market Funds

You can buy shares or units in a money market fund in the same way as any other mutual fund or ETF. So you can use one of the many online trading platforms that provide easy access to the whole market.

Here are 9 examples of money market funds with links to help you start your own research:

  1. Invesco Premier Portfolio Fund — IMRXX
  2. Vanguard Treasury Money Market Fund — VUSXX
  3. Federated Hermes Prime Cash Obligations Fund — PCOXX
  4. Schwab Value Advantage Money Fund — SNAXX
  5. Vanguard Federal Money Market Fund — VMFXX
  6. Fidelity Investments Money Market Portfolio — FMPXX
  7. Wells Fargo Cash Investment Money Market Fund — WFAXX
  8. Fidelity Money Market Fund — SPRXX
  9. Pimco Government Money Market Fund — PGFXX

What Are the Returns for A Money Market Fund?

Investing in money market funds is not going to make you rich. In fact, the low risk nature of the underlying investments made by this type of fund mean that returns are very low. As such, investors often use these funds as a place to park cash while they are waiting to invest in other investments with more potential from growth and income.

Money market fund are low risk investment that pay out low returns

According to Forbes, the best money market mutual fund in August, 2021 was the Invesco Premier Portfolio Fund. this fund had a 7-day yield of 0.01% at the time of writing, and investors can buy into this $1.5 billion fund for as little as $1,000.

Related: US Treasuries | The Absolute Gold Standard of Low Risk Monthly Income Investments

Are Money Market Funds Risky?

The short answer is, no. Of course, no investment is entirely without risk, however this type of fund is seen as one of the lowest risk investment options available.

There is little chance of losing significant amount of money in this type of investment. That said, due to the low returns, there is a risk that you could lose some purchasing power as the rate of inflation is more than the return you are getting.

Fund management fees can also eat into your capital. And, investments in these funds are not insured by the FDIC. This means they are not totally free of risk like cash deposits up to $250,000.

Related: International Bonds | What are They? How to Invest? Rates of Return and Risks

Conclusion and Resources

Informed investors make better decisions. If you want to learn more about money market funds, you can further your research using the following resources: