Money Market Funds

Money market funds are mutual funds that invest in items such as certificates of deposit and treasuries.

Did You Know? You can also invest directly in money market accounts through institutions such as banks and credit unions.

The most common type of money market fund invests in various items, including treasuries, certificates of deposit, and commercial paper. Some money market funds invest in securities guaranteed by the federal government. Then there are funds that invest in municipals, which means that the interest earned from these funds is not subject to federal income tax. Finally, some money market funds invest in state municipals, and residents of that state don't have to pay federal or state income tax on the interest earned.

Not only do some money market funds have built-in tax advantages, but also, as far as risk goes, money market funds are the one of the safest types (and can be the safest depending on what items make up the fund) of mutual fund you can invest in. Also, money market funds usually have conveniences attached such as the ability to write checks on your account.

What's the downside of these investment vehicles? It's the usual downside attached to low risk investments--low interest rates and yields on your investment. However, if the tax advantages may increase your actual return to a level that makes money market funds a competitive low-risk investment. Also, if you're looking for a place to stash some cash where it's easily accessible or available in the short-term, money market funds make a financially sound alternative to savings accounts and certificates of deposit.