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A money market fund is a
type of mutual fund that invests in short-term loans ranging in maturity from one day to
one year (although the average maturity is 90 days). The investment holdings are generally
of a very high quality.
There are four basic types of money market funds:
U.S. Treasury Funds. These invest primarily in U.S. Treasury obligations (such as
T-Bills).
U.S. Government Funds. These invest in obligations of the U.S. Treasury as well as those
of U.S. government agencies.
General Funds. These invest in the short-term debt of large, high quality corporations and
banks.
Municipal Funds. These invest in the obligations of state and local government agencies.
Income on this type of fund is exempt from federal income taxes, and sometimes state and
local taxes as well.
Because money market funds are low-risk, they typically provide the lowest returns among
mutual funds. Their main uses are to park money between investments and to save for
short-term goals. A small position in money markets may also reduce risk somewhat in a
long-term investment account.
You should remember that, as a rule, it is never a good idea to invest in any fund until
you read its prospectus and understand the risks involved. |
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