Money Market vs. Mutual Fund
What is a Money Market Investment?
A money market is a component of the broader financial markets. Money markets are short-term assets involved with short-term borrowing and lending. A money market investment possesses a maturity date of one year or shorter.
Trading in money markets, will involve investments in commercial paper, Treasury bills, bankers’ acceptances, short-lived mortgage and/or asset-backed securities and bankers’ acceptances.
Money market participants will include financial institutions and broker dealers who wish to borrow or lend to fund the global financial system. Investments in this field contrast with the capital market, or longer term-funding strategies, which are typically supplied through the transfer of bonds and/or equities.
The core of the money market consists of interbank lending; banks borrow and lend to each other using repurchase agreements, commercial paper and similar financial instruments.
What is a Mutual Fund?
Mutual funds are professionally managed collective investments. A mutual fund will pools capital from a number of investors and then buy an assortment of short-term money instruments, stocks, bonds and/or other securities. These investments are conservative in nature; a mutual fund is a properly-diversified investment.
A mutual fund, in the United states, must be registered with the Securities and Exchange Commission. A mutual fund, when registered, may be overseen by a board of directors or organized as a corporation, trust or board of trustees.
A mutual fund's board is responsible for ensuring the effectiveness of the investments latent in the mutual fund. The fund manager, in turn, is responsible for trading (buying and selling) the fund's pool of investments. The fund manager must build an investments strategy that is properly diversified and adheres to the fund's investment objective.
Mutual funds, so long as they comply with certain requirements established by the Internal Revenue Code, are not taxed based on income generated. To avoid this taxation, a mutual fund must diversify its investment pool, distribute income annually to their investors, limit ownership of voting securities, and generate income through their investment strategy.
Money Market vs. Mutual Fund:
When analyzing a money market vs. mutual fund, you must understand that all money market funds are types of mutual funds that invest specifically in money market instruments, such as banker’s acceptances, commercial paper, Treasury bills, federal funds and certificates of deposit.
The mutual fund, in a general sense, is a type of investment pool that will invest according to a specific strategy. This style, which is developed by the fund manager or board, creates a dichotomy between the two investments, because the mutual fund can invest in an assortment of financial products to match the specific funds’ goals.
Money market funds are regarded as more conservative investment types. Because of this increased safety, the money market fund will yield a lower annual percentage rate of return, than a mutual fund. Some money market funds will be particularly conservative and only invest in government funds; these fund have AAA ratings and offer very low interest rates. Furthermore, unlike a mutual fund, all money market investments are covered by FDIC insurance.
Time is considered--when analyzing a money market vs. mutual fund—a defining characteristic in the two investment options. As stated before, all money market accounts mature in one year or less; this time-frame contrasts from a mutual fund, which enables an investor to hold or sell the investment for as long as they please. Additionally, in money market vs. mutual funds, an MMA will limit the number of withdrawals the holder can process in a year.
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