Money Market Mutual Fund

How Money Market Mutual Fund Investments Were Tested By The Financial Crisis

Money market mutual fund investments, or money market funds, are an investment which deals in short term debt securities. The strange feature of this investment is the way it attempts to maintain a constant price of $1. It is possible to make a profit from the dividend which is paid out to investors, but it should never be possible for investors to benefit from rising prices. These investments are there to improve liquidity in financial markets, and they have traditionally performed well. It took the 2008 financial crisis to finally break the system.

By investing in short term debt securities, the investor is able to make a small but virtually guaranteed profit on investment. The markets are able to use the money to stabilize their interests, as any money put into the market is invested in the shortest term debt securities. The weighted average maturity must be maintained at sixty days or less, and there are limits as to how much money can be put into any one investment. Government securities, which are guaranteed payable, are exempt from these limits.

The system has worked exceedingly well since its inception, but in 2008 the $1 standard was breached for the first time. The reason was a corporate failure, and the need of the fund to pay back monies which were owed as a result. The ensuing crisis brought turmoil which could be compared to a run on the banking system. The money market fund system did survive, though, and although confidence has been badly shaken, it remains in place today. There is no sign that the long term depressed state of the economy is going to have a long term effect on these markets.

As well as standard money market funds, it is also possible to invest in ultra short bond markets. These are mutual funds themselves, created for the intention of investing in bonds which are very close to maturity. Again, the reason for the existence of this investment is to smooth out the extremities in the market, and to help the bond market to function as smoothly as possible. Due to the fact that the funds are traded so quickly, there is a potential for gain.

The future of money market mutual fund investments remains uncertain, although the market appears to have stabilized since the crisis of 2008. Activity is low, as is inevitable when the very foundations of an investment are found to be wanting. It is unlikely that these events will be repeated in the near future, so if you are considering this investment there is no reason to change your mind. Unlike investing in a single stock, no-one lost every cent they had invested even during the worst market conditions. There is inbuilt stability with a money market mutual fund.

 

 

 

 

 

 

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