Money Market Basics Cambridge MA

The moment you deposit money into an investment account, it starts to work for you. It doesn't earn interest, as in a typical bank account, but it doesn't just sit there either. Your cash is automatically "swept" into purchases of shares in something called a money market fund (sometimes known simply as a money fund).

Money Market Fund Explained

A money market fund is really a mutual fund. The money fund's manager invests the fund's assets in short-term bonds, providing a fairly safe and predictable return. Note that we said "fairly safe" - as with any investment, a money market is never completely risk-free, though they do come pretty close, since government bonds are the usual investment vehicle of choice for money market funds. Money market funds have failed in the past, though it's quite rare for that to occur.

How Money Markets Work

The price of a single share of a money market fund is always constant at $1.00 a share. How then, you might ask, can you make money by investing in a money market? Because the money market invests in bonds, those bonds do pay a yield, which creates income for the money fund shareholders. That income is computed daily as dividends; those dividends are credited to your account on a monthly basis. (Most people think of these dividends as "interest," and that's a fair comparison.) These dividends often add up to be a bit more than you get from a typical savings account at your bank, but the effective yield can vary from day to day and month to month.