What’s a money market fund?

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.