## Money Market Funds: Registered Investment Companies
Money market funds (MMFs) are investment companies that pool money from multiple investors to purchase short-term, highly liquid debt instruments, such as Treasury bills (T-bills) and commercial paper. They offer investors a way to earn a return on their cash reserves while maintaining a high degree of liquidity.
**Types of Money Market Funds**
There are two main types of MMFs:
* **Government MMFs:** These funds invest primarily in government-issued securities, such as T-bills and Treasury notes.
* **Prime MMFs:** These funds invest in a wider range of debt instruments, including commercial paper, bankers’ acceptances, and certificates of deposit.
**Registration with the SEC**
MMFs are registered investment companies with the Securities and Exchange Commission (SEC) under the Investment Company Act of 1940. This registration requires MMFs to meet certain requirements, including:
* Filing periodic reports with the SEC
* Hiring an independent custodian
* Maintaining a board of directors
* Providing investors with a prospectus
**Advantages of MMFs**
MMFs offer investors several advantages, including:
* **High liquidity:** MMFs can be easily converted into cash, making them a good option for short-term investment needs.
* **Low risk:** MMFs are considered low-risk investments due to their short-term nature and diversification.
* **Stable returns:** MMFs typically provide a stable return, which can be higher than traditional savings accounts.
* **Tax efficiency:** Money market fund distributions are typically eligible for tax advantages, such as tax-exempt status.
**Considerations for Investors**
Before investing in a MMF, investors should consider the following:
* **Expense ratio:** The expense ratio is the annual fee charged by a MMF to cover its operating costs. Lower expense ratios result in higher returns for investors.
* **Yield:** The yield is the annualized rate of return on a MMF. It can vary based on market conditions and the type of securities held by the fund.
* **NAV:** The net asset value (NAV) is the daily per-share value of a MMF. It is calculated by dividing the total value of the fund’s assets by the number of outstanding shares.
* **Credit quality:** Investors should consider the credit quality of the debt instruments held by a MMF. Higher credit quality means lower risk but also lower potential returns.
**Wrap-Up**
Money market funds offer investors a safe and liquid way to earn a return on their cash reserves. They are registered investment companies with the SEC and provide a stable and tax-efficient investment option. However, it is important for investors to carefully consider the expense ratio, yield, NAV, and credit quality of a MMF before investing.