A money market mutual fund is an open-ended mutual fund that invests exclusively in long term bond securities including government notes, commercial paper and treasury bills. Money market mutual funds are usually managed by investment banks, private banks, investment funds and other financial institutions that buy bonds and certificates of deposits for the purpose of holding a steady level of cash asset value. Unlike other types of funds, money market mutual funds don’t have minimum balance requirements, so they can be used for any type of investment.
A money market fund seeks to maintain a high level of income by investing in a wide variety of short term debt securities. Because most of the money is invested in bonds, this is also known as “fixed income.” The primary advantage of an investment fund is that they offer low-risk alternatives to traditional options. Since the money is not tied to any particular security or market index, the risk associated with it is much less.
Because a lot of real estate is considered a fixed income, this type of fund is typically referred to as “real estate” mutual funds. There are several types of money market mutual funds, which include:
Small Cap Value: Small cap value funds invest primarily in companies that are relatively new and/or small and are expected to grow rapidly. Although small cap value funds may include smaller, younger companies, most of their investments are those of larger, more mature companies.
Mid-Term and Long-Term: Mutual funds typically invest in both long and short term money. These funds typically seek to diversify across different market segments. The types of companies that may be included in the portfolio of these mutual funds include:
Real Estate: Real estate is classified as a market-oriented portfolio because many investments in real estate will likely appreciate or depreciate over time. The difference between a “fund that actively manages the portfolio and a “fund that just buys and sells real estate is the difference between a real estate fund and an index fund.” Typically, real estate funds have higher expense ratios and carry more risk.
Bond Index Funds: Bond index funds invest in a basket of bonds whose return on investment is based on changes in the interest rates of certain financial securities. In general, bond index funds focus on U.S. debt securities and other bond-based assets. Bond index funds tend to hold a wide range of maturity dates and are considered “long term.”
Bond Index Fund: Bond index funds invest in a basket of bonds whose return on investment is based on changes in the yield on bonds of certain financial securities. Bond index funds typically target a particular industry or country and invest in a wide range of bonds at the same time. Bond index funds generally have higher expenses and a lower degree of risk than money market mutual funds. Bond indexes also offer higher liquidity, so they are traded less frequently than other mutual funds.
Intermediate Term: Bond index funds are designed for investors who have a longer time horizon for the investment. Bond index funds typically include a broad range of bonds and financial instruments, such as U.S. treasury bills, notes, and certificates of deposits. Because bond index funds generally pay their dividends more slowly, they have a slower rate of return than mutual funds that are designed for quick growth.
Corporate Bond Index Funds: Bond index funds are not a “traditional” type of fund. They do not use the traditional method of investing in bonds by buying and selling on an existing market and do not use standardized investment instruments.
The funds that are categorized as corporate bond index funds include Treasury bonds and CDs. These funds typically provide a high level of diversification by holding a number of different types of bonds and other securities.
Another classification of bond index funds is the hybrid type of fund. Hybrid bond index funds are often referred to as hybrid or “catch-all” funds. These are the most flexible and potentially the safest of all the types of bond index funds, as they can invest in a broad range of assets without requiring any special research. The funds may also invest in both the bond and stock markets.