Because money market funds invest to maintain
their value at $1 a share, they're considered stable, cash-equivalent
investments. However, the interest they pay is comparable to what
you earn on a
certificate of deposit
or bank
money
market account,
and less than the average return on stock
or bond funds. This means that while these funds may be a good
choice for preserving your capital or holding your investment
assets, they aren't well suited to providing investment growth
or long-term income.
Most money market funds let you write checks
against your account value. Because the share value remains at
$1, you don't have
capital
gains
or losses when you liquidate shares, as you would
with a stock or bond fund. There's usually no charge for
the checks, though there may be a per-check minimum — often
$500. Unlike bank money market accounts or interest-bearing checking
accounts, however, they're not
FDIC-insured.
The tax picture
Money market funds may be taxable or tax
free. Taxable funds buy the best-yielding short-term corporate
or government issues available, while tax-free funds are limited
to buying primarily municipal debt. Taxable funds pay slightly
higher income than tax-free funds, but you must pay federal and
sometimes state and local income tax on any distributions you
receive. Most tax-free funds are established for specific high-tax
states such as New York or California.
