What are the Disadvantages of Money Market Mutual Funds
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Money funds earn prevailing short-term interest rates, but this means that your cash barely keeps up with inflation. After you pay taxes, the purchasing power of your money goes down. If you invest in tax-exempt funds, you don't earn enough to keep up with inflation.
Money markets are not insured by the U.S. government's Federal Deposit Insurance Corporation (FDIC).
Therefore, money market funds are not good long-term investments
Most money market savings accounts don't let you write unlimited checks for any ol' amount, as local banks do. Checks have to be written for a minimum amount (often $100 but your account could be different), so they're not good for paying a $25 sewer bill. Also, funds may restrict the number of checks that you write every calendar month.
These funds also charge management fees and expenses, for giving the convenience of investing in market-rate, short-term, fixed-income securities. Therefore, you could obtain slightly higher yields on your money if you invest in commercial paper directly. Of course, you would have to have a lot of money to do this. Plus, dealers would charge you "retail" prices, and you would not obtain the same diversification.
Since these money funds track prevailing interest rates, if short-term interest rates in the overall economy go down, so does the yield on your money.
What are the risks of money market mutual funds
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