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Money market funds provide easy access to your money. You generally can withdraw money anytime penalty free, and many funds offer check-writing privileges. They also are a good choice for short-term investments. For example, you can use a money market fund to build an emergency account with at least three to six months of your living expenses, giving you a reserve for the unexpected.
Money market funds may provide a conservative element to your portfolio, potentially adding stability, because they seek to preserve your principal by maintaining a stable share price.
Holding a portion of your investments in a money market fund also provides a convenient place to keep money to use when you rebalance the asset allocation in your portfolio.
Money Market Fund: An investment in the fund is neither insured nor guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the fund seeks to preserve the value of your investment at $1 per share, it is possible to lose money by investing in the fund.
Money market funds invest in short-term debt securities that mature in a little more than one year or less. There are a variety of money market mutual funds and many types of securities that the U.S. government and its agencies, corporations and state and local governments issue. Be sure to read a prospectus to learn more about the specific securities in which a fund invests.
You may want to consider the tax implications of money market funds before investing.
Tax-exempt money market funds primarily invest in securities that a state or municipality issues. These funds can be beneficial for investors in a high tax bracket since income from these funds generally is exempt from federal income tax. However, income may be subject to state and local taxes and the federal Alternative Minimum Tax.
Keep in mind, municipal money market funds typically are unsuitable for tax-deferred investment accounts, such as IRAs or 401(k) plans, because of their tax-exempt status.
Taxable money market funds generally invest in short-term government or corporate securities. They tend to offer higher yields than tax-exempt money market securities. However, you'll pay taxes on income from the funds.
Try our Taxable-Equivalent Yield Calculator to compare the returns of a taxable money market fund to a tax-free money market fund.
Also compare fund expenses and minimum balance requirements, which vary among funds, to determine the best investment for you.
If you're looking for preservation of capital and the opportunity to access your money when you need it, money market mutual funds may be a good addition to your portfolio.
Consider what role you want a money market fund to play in your portfolio and adjust your asset allocation to fit your investment goals.
1Early withdrawal from a CD causes a minimum penalty of seven days' interest. Maximum penalties are up to the discretion of each financial institution and can vary.
IRS Circular 230 Disclosure: American Century Companies, Inc. and its affiliates do not provide tax advice. Accordingly, any discussion of U.S. tax matters contained herein (including any attachments) is not intended or written to be used, and cannot be used, in connection with the promotion, marketing or recommendation by anyone unaffiliated with American Century Companies, Inc. of any of the matters addressed herein or for the purpose of avoiding U.S. tax-related penalties.
This information is for educational purposes only and not intended as tax advice. Please consult your tax advisor for more detailed information or for advice regarding your individual situation.