Investing can be a daunting proposition, especially if you have never ventured into the game before. It can be a challenge to figure out what is a sound investment and what isn’t, and how to balance the potential for profit with the potential risks. When it comes to money market funds return rates are in the low single digits, which is less than stocks or other entities, but the risk to the principal investment is also lower than with other types of investments. There are pros and cons to money market funds and this article examines both sides of that coin.
The pros
A solid investment in an unstable market
When the market is volatile, it can be a challenge for investors to know where to put their money. Money market funds are a great place to safely put your money. This is because money market accounts are less risky in a downward market than stocks and bonds. And even though the return on these investments can be lower than with other types of investments, in a volatile market even a small return is welcome.
They are easily liquidated
Generally, money market funds trade in things like T-bills, which means that they are more liquid than other investments.
The cons
Buying power can be negatively affected
Money market funds can lessen the investor’s buying power. Because these funds offer comparatively low rates of return, they sometimes don’t keep pace with inflation. In other words, the money earned by investing in money market funds may actually be less that the rate of increase in the cost of living.
Also, because the return rate on a money market fund is typically fairly low, any profit made can easily be diminished by fees and expenses associated with the investment. That can make it even more challenging for investors in these funds to keep pace with inflation.
Variance in returns
Money market funds typically invest in government securities and other types of entities that are considered generally safe. However, sometimes funds take bigger risks in order to garner bigger yields for their investors. Although it can be tempting to investing in high-yield money market funds because of the potential for higher payoff, remember that there is also a potential for greater loss.
What all of this boils down too, then, is that investing in money market funds can be a very safe, smart financial move. However, as with investing in anything, investors in money market funds should be aware of both the pros and the cons of the situation. Depending on your particular risk comfort level, the amount you are investing, and the state of the market in which you are investing, money market funds may or may not be the best option for you. If, however you are looking for a place to grow your money modestly with not much risk, they can be a good option. Talk to a financial advisor today to determine the best course of action to match your particular situation.
David Allred is the author and creator of CFW. David has been teaching entrepreneur minded people how to earn a full time income working from the comfort of home for nearly a decade.
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