What Is a Money Market Fund?

For a small initial investment as low as $500 (depending on the fund), you can participate in money market investments. Money market instruments provide relatively high yields on short-term investments. Direct participation in the money market would require investments of $10,000 or more, which keeps some investors out. Money market funds, however, pool money from large numbers of investors and use it to buy these securities.

The net asset value (the value of a single share, determined daily) of a money market fund is kept at $1.

Although not guaranteed to stay at $1, money market fund net asset values have usually been kept at $1 due to the stability of the underlying investments. This means that if you own 3,380 shares, your fund will be worth $3,380. Fund managers have been able to maintain the $1 per share value by allowing the dividend rate to fluctuate, rather than the share price.

The returns on money market funds depend on the yields of their individual holdings. Due to the short terms of money market instruments, individual yields fluctuate. This causes the overall yield of a money fund to fluctuate as well. Investors who hold money funds can track the funds' yield changes in the financial pages of most major newspapers.

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