What is Money Market Fund?

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Money market funds are funds that primarily invest in short-term debt, typically in short-term government bonds, commercial paper, etc. The characteristics of money market funds are low risk, low return, and high liquidity.

Definition

A money market fund is a type of mutual fund that invests primarily in short-term debt securities such as Treasury bills and commercial paper. Money market funds are characterized by low risk, low returns, and high liquidity.

Origin

Money market funds originated in the United States in the 1970s, initially created to offer a higher-yielding alternative to bank savings accounts. The first money market fund, The Reserve Fund, was established in 1971, marking the inception of this investment tool.

Categories and Features

Money market funds are mainly categorized into government money market funds, prime money market funds, and tax-exempt money market funds. Government money market funds invest in government securities and have the lowest risk; prime money market funds invest in a variety of short-term debt instruments and offer slightly higher returns; tax-exempt money market funds provide tax advantages. Overall, these funds share common features of high liquidity and low risk.

Case Studies

A typical example is Vanguard's money market fund, which provides stable returns and high liquidity by investing in short-term Treasury bills and high-rated commercial paper. Another example is Fidelity's money market fund, which focuses on offering tax-exempt investment options, attracting many investors looking to reduce their tax burden.

Common Issues

Investors often worry about the low yield of money market funds, especially in low-interest-rate environments. Additionally, although the risk is low, money market funds can face liquidity issues under extreme market conditions.

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Switching Costs

Switching costs are the costs that a consumer incurs as a result of changing brands, suppliers, or products. Although most prevalent switching costs are monetary in nature, there are also psychological, effort-based, and time-based switching costs. Switching can also refer to the process of rebalancing or changing investments.

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Proprietary Trading

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Active Management

The term active management means that an investor, a professional money manager, or a team of professionals is tracking the performance of an investment portfolio and making buy, hold, and sell decisions about the assets in it. The goal of any investment manager is to outperform a designated benchmark while simultaneously accomplishing one or more additional goals such as managing risk, limiting tax consequences, or adhering to environmental, social, and governance (ESG) standards for investing. Active managers may differ from other is how they accomplish some of these goals.For example, active managers may rely on investment analysis, research, and forecasts, which can include quantitative tools, as well as their own judgment and experience in making decisions on which assets to buy and sell. Their approach may be strictly algorithmic, entirely discretionary, or somewhere in between.By contrast, passive management, sometimes known as indexing, follows simple rules that try to track an index or other benchmark by replicating it.

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Lead Bank

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Periodic Interest Rate

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Index Option

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