Popularity of Money Market Mutual Funds Continues to
Rise
Money market mutual funds have
been around for a few decades, but popularity in these types of
mutual funds has risen even more in recent
years.
One reason for the increase in
popularity of money market mutual funds is that the return has
increased to a height of four to six percent. This may not seem
like a high return compared to other funds.
However, combined with the other
advantages of money market mutual funds they make for a
good investment choice for beginning investors and young
families.
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Investors Save with Index Mutual
Funds
Index mutual funds are funds
that copy the stock market
index. The index mutual funds
purchase all of the stocks in
an index at the percentages of
the index. Index mutual funds
are not for investors who like
to shift their money around.
However, for those that want to
invest their money and leave it
in the capable, low risk hands
of a mutual fund manager for a
long period of time will likely
see a large return on their
investment.
Index mutual funds typically
provide a much higher return at
a much lower risk. The S&P
500 index mutual funds beat out
the returns on eighty percent
of traditionally managed mutual
funds each year. These numbers
do not even take into
consideration the money saved
in expense ratios or from not
being required to pay capital
gains taxes.
Index mutual funds save
investors money in many ways.
First, the fees associated with
index mutual funds are
typically much lower than with
other types of mutual funds,
with some index fund expense
ratios averaging as low as
.18%. This is an obvious
advantage to investors, made
possible by the fact that most
of the work of managing index
mutual funds is handled by
computers rather than fund
managers.
The other way that investors
save with index mutual funds is
at tax time. Common mutual
funds are required by law to
pay out capital gains each
year, regardless of whether or
not the mutual fund actually
made any money. The capital
gains are taken out of the
mutual fund net value, and
therefore lower the return on
your investment. As if this
isn’t bad enough, Uncle Sam
takes the chunk of the capital
gains for income tax.
Index mutual funds are not
required to pay out annual
capital gains. This is due to
the fact that index mutual
funds hold onto stocks much
longer, and do not actively
trade throughout the year. This
allows what would be tax money
to remain in the mutual fund
and continue working to build
your investment.
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Money market mutual funds are low risk, even though
they are not insured by the FDIC. This is due to the types of
investments that money market mutual funds engage in. Money
market mutual funds portfolios include short term debt
securities such as those of government agencies, banks,
corporations, and treasury bills. Since the largest portion of
investment in money market mutual funds is typically in
treasury bills, paid by funds raised through taxes, there is
very little risk involved.
Money market mutual funds are also the most easily
liquidated. They earn more money than savings accounts and CDs,
while allowing investors to liquidate a portion or all of the
fund when needed. Most money market mutual funds allow
investors to write an average of three checks per month from
the fund.
The largest reason for the popularity of money market mutual
funds is their advantage for young families. Those saving for a
new home, a home addition, coming children, or a new minivan
can do so while still being sure that they can access their
money in the case of an emergency. While you can save for these
situations using CDs or savings accounts, there is no reason to
do so when you can earn a much higher return on your nest egg
through a money market mutual fund.
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