In building your nest egg, choices of investments with diverse portfolios abound. Like many other investors, you should look for two things -- more return and less risk. Money market and treasury funds rank as low-risk investment strategies that offer moderate returns. Understanding how each one works will help you make informed decisions in allocating your investments.
Money Market Basics
As required by law, a money market fund, a type of mutual fund, invests in low-risk securities and pays dividends that generally reflect short-term interest rates. While not federally insured, types of investments chosen by money market funds include government securities, certificates of deposit, commercial paper of companies and other short-lived mortgage- and asset-backed securities. The net asset value, or NAV, money market funds aim for should stay constant at $1 per share, with only the yield rising or falling. Investments performing poorly can affect the money market fund's per share NAV, causing it to fall below $1. Although possible, investment losses in money markets rarely happen.
Aside from having low risks, money market funds often come at discounted rates and use bond equivalent yield (BEY) quotes that you compute by multiplying the interest rate of term by the number of terms per year. In addition, money market funds provide a fast and less expensive mode of purchasing cash equivalents to pay for short-term loans.
Unlike money market funds, treasury funds are securities issued by the U.S. Treasury Department, and governed by state policies and interventions. As marketable or non-marketable union funds, they come from dues, initiation fees, investment earnings and any other funds not qualified as voluntary. Examples of marketable funds include Treasury bills that mature in 52 weeks, 10-year Treasury notes, Federal Financing Bank securities, and other state and local bonds. You can purchase marketable treasury funds and resell them to the public, but you hold non-marketable treasury funds, such as savings bonds, until they reach maturity.
A Treasury fund may have strong financial endorsements issued by the government, but known risks can potentially hit an investor. Treasury bonds can drop in price without warning once the market interests rise, plunging Treasury securities to a much discounted net asset value, and further translating to heavy capital losses. Treasury securities rely heavily on inflation indexes that make them susceptible to the unpredictable movements of national and global markets.
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