Money Market Accounts
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Money money accounts (MMA) are a particular type of open-ended mutual fund. They specialise in short-term debt instruments of the money market (MM) -- the huge range of borrowing and lending of money for under one year.
These money funds started out in the early 1970s. The first one was The Reserve Fund, established in October 1971. Before that, the only place you had to put your short-term money where it'd be both safe and liquid were passbook savings accounts in banks, which paid a low rate of interest according to government regulations.
High income investors could place their money in money market investments, but until money market funds were started, market rates of short-term interest were not available to average people. They are also called retail money market funds.
Over 2,000 Money Market Deposit Account Funds Hold Over $2.3 Trillion
These are fixed income securities which are very safe and very liquid. Money market mutual funds invest their money in these short-term, fixed-income securities. They make a profit because these securities pay interest. They are a form of debt. Management takes out a certain percentage as its profit and reward, and pays the rest out to the mutual fund shareholders once a month.
By law enforced by the Securities and Exchange Commission, money funds must keep the weighted average length of their investments under 90 days. This short-term emphasis makes them very safe. They are allowed to hold investments with periods that go up to 397 days -- but the average must stay under 90 days. In practice, most keep their average maturity length under 50 days.
They must also place their money in highly rated investments. They cannot place more than 5% of their funds with any one investment or issuer, except the U.S. government.
The yield quoted for them is the earnings of the last 7 days.
Money Market Accounts (MMA) Are Good Places to "Park" Money Short Term
Say you just got a $10,000 insurance settlement and you haven't decided how or when you're going to invest that money on a permanent basis. While you're doing your due diligence, place it in a money mutual fund so it will at least earn some interest and be safe.
It would be safe in your ordinary checking account, but wouldn't earn any interest.
And let's say that you do need to use some of that money? For example, maybe you know that you need to use $2000 to pay off the balance of your Visa card. You can just write a check. Money market funds are demand deposit accounts that come with checks just like your personal checking account at your local bank. The one difference is that there's a minimum check amount. This might be $100-$500, depending on the particular mutual fund. Make sure you know the rules of any mutual fund you deposit your money into.
About Money Market Mutual Fund Accounts:
Because cash in a money fund is safe, earns a dividend, is liquid and available by check, but not in small checks, many people use them in conjunction with their local checking accounts.
You can have your paycheck go to a money fund by direct deposit. Then you write a check from your money fund to your local bank for just enough money to cover your need to have cash available at ATM machines and to pay small bills (under $100). The remainder sits in the money fund account and earns interest until you either use it to pay bills that require checks over $100 or transfer it to a more permanent type of investment.
The largest retail money fund is Fidelity Cash Reserves (ticker symbol: FDRXX). They obviously have an advantage, because so many people are invested in their mutual funds. Other large mutual fund families, such as Vanguard, also have large mutual funds. So does Charles Schwab, since so many people use that company as their brokerage and cash management accounts.
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