What is a money market mutual fund? A money market mutual fund is a closed-end mutual fund that invests in short-term securities like US Treasury bonds and commercial mortgage paper. Unlike other types of mutual funds, money market funds do not have front or back money invested. Instead, they accumulate funds over a period of time, allowing investors to buy and sell bonds as often as they want. Money market funds pay out regular income to investors, in the form of dividends, while maintaining a highly steady asset value through fluctuations in market prices. They are an excellent choice for people who are risk-averse because they offer high interest rates on their investments along with a low-risk factor.
The tax treatment of a money market fund depends on several factors. These include the type of investment and whether it is treated as a qualified retirement account (RRS). All US taxable income is taxable, even if the investors have already reached the age of 50. Any amount of income, however large or small, which is not eligible for tax treatment as income through the US retirement plan, can be reinvested in additional money market securities and receive a tax deferral.
Qualified retirement accounts (RRS) provide tax deferral only on amounts invested within the account, and not on the value of the account itself. The value of mutual funds is not eligible for distribution with RRS. Unlike money market securities, however, real estate investment property does not qualify for distribution with RRS. For most investors, this means that the full face value of the investment property will be taxed as income during the year of purchase. This amount will then be distributed between the owners in the following years, depending on the distribution schedule agreed upon between the investors and their mutual fund manager.
Money market funds generally deal exclusively in real estate properties. These types of securities are both highly volatile and highly sensitive to changes in other areas of the market. When property values drop, so does the value of these securities. Conversely, when they rise, so does the value of these securities. In order to hedge their exposure to fluctuations in the real estate market, money market funds diversify their portfolio by investing in a wide range of both equities and derivatives.
Some money market funds specialize in real estate, while others offer a wide variety of securities. One popular option is to invest in mortgage-backed securities (MBS). MBS are highly liquid, yet highly risky. Because they are backed by the mortgage company that issued the underlying securities, they carry interest rates much higher than the rates on individual pieces of real estate. Because of this advantage, MBS typically carries a low-risk reputation, making them attractive to new investors and businesses. However, despite their name, MBS are not low-risk investments and should be treated as such.
As with most high-risk ventures, the risks involved with money market funds also include higher fees and less flexibility. Because these funds are more concentrated than other mutual funds, there is typically less leeway in how management funds may invest. Managers are limited in how they can invest by the contract stipulations outlined in each fund’s charter. This can limit an investor’s options and increase the chances of losing money. Because these funds were designed for the financial crisis, some investors who originally sought a way out of their mortgage payments have instead found themselves deeper in debt.
Another risk associated with money market funds comes from the investment itself. Unlike other types of mutual funds, money market funds often deal exclusively in residential properties. In the past, investors used the properties as collateral to secure loans. However, since the housing market cratered, many investors now prefer to put their money into other types of real estate such as commercial properties. If an investor buys into a Nav Restos property and then has trouble paying it back, he could lose his entire investment.
The advantages and drawbacks of these funds make them an attractive choice to invest money in, but they should be examined carefully before any investment is made. Because they are high-risk vehicles, only the most experienced investors should use them. Additionally, they may have less flexibility than some other types of mutual funds. Any gain made on the sale of a Nav Restos property will not be tax-deductible. While the disadvantages of money market funds can be severe, if you use a few tips to ensure that your Nav Restos investment produces a higher return than your other investments, you should be fine.