Are Money Market Funds Safe Investments

Most money market funds require a minimum deposit of $1,000 or more. Money market funds allow instant access to your money without penalty when you need to withdraw money, and you have the option of cashing in your shares by phone, mail or through a broker if you select a brokerage-sponsored fund. Most funds give you checks to write against your accounts, provided the checks are greater than $500 in denomination. If you arrange in advance, you can also withdraw money from a money market fund via a wire transfer to your bank account.

If you don’t have $1000 available to open a money market fund, you might look into money market funds that waive an opening minimum deposit if you set up an automatic savings plan and have money moved from your bank account to your money market on a consistent (and automatic) basis. The minimum amount to save on an automatic savings plan will vary from one fund to another but most require at least $50 per month.

Another option for using money market funds for individuals who don’t have a minimum deposit is to use Paypal. Paypal considers the money saved in your Paypal account to be part of money market funds (if you select that option) and the yield varies depending on the market just like other money market funds. Visit for more information about how you can opt to include your Paypal account balance in the mutual fund.

Safety of Money Market Funds

A money market fund is not federally insured by the FDIC the way a savings account is. Despite of the lack of insurance, money market funds are considered to be an extremely safe investment. Money markets started in the 1970’s, and out of the hundreds of funds only 2 have ever had financial trouble.

The reason money market funds are considered safe is because regulations only require that 5% of a fund’s assets are held of any on institution other than the obligations of the US government. The safest money market funds are those that only invest in US securities. In exchange for the increased safety net, you’ll earn a point or two less interest.

Tax-Exempt Money Market Funds

The dividends earned on most money market funds are completely taxable but there are some funds that invest in tax-exempt securities which means their dividends are not taxed by the IRS at the federal level. You do still have to handle state and local taxes on these dividends. It doesn’t make sense to buy tax-exempt funds unless you are in a high tax bracket because their yields are much lower than those paid by taxable money market funds.