There are several types of mutual funds. I would like to talk about all of them in one post, but such post will look like an article in a scholar book, and will be quite boring, right? So, I’m going to break the rules and talk about it in small portions, when I have the right mood That will be my new series of post devoted to the low risk investments in mutual funds.

You’ve heard a lot that investing in mutual funds is less riskier then in stocks because your money is served by a group of experts. However, there are different groups (types) of funds with different risk/profit ratio.

Money Market Funds

The low-risk, low-profit corner is occupied by money market funds. Money market fund is the most basic mutual fund investment in short-term debt, or “paper”, issued by the US Treasury (or any similar organization in your country), banks and large corporations. You are simply lending your money to government agencies or corporations, and in return, they will pay you market interest rate (not very high, unfortunately).

Short Term

Such loans are for very short terms, ranging from one day to perhaps 90 days. The government regulations mandate the average maximum loan term of no more then 120 days, plus it forces money market funds managers to invest only in the high grades of debt, which is less riskier.

It is safe

The two top reasons, why such investments will be safe, are 1) short terms (less opportunity for something go wrong) and 2) the high credit standards enforced by the government. Besides, such funds are dealing with money, thus your investment can be converted directly into cash very quickly, and considered to be the equivalent of cash.

The money market funds work slightly different then the majority of funds in generating your income. Due to the high stability rate, a share in money funds will always have a fixed price in opposition to a stock fund which price per share fluctuates from day to day. So, if you invest $100 in a money market fund, you will own 100 shares and the price will always remain at $1. No surprises at all.

Money Making

The way you make money and generate taxes for the government on these funds is through the interest earned by lending your money. That interest rate is adjusted every day to reflect the changes in the money market (currency prices against other currencies, economy health, world news, etc). Usually, the stronger the currency the higher the interest rates. The interest rates may vary from 3% to 16% during a year.

If you are a 0-45 year old investor with less money, you would prefer more aggressive investment then money market funds, and the older you are, the less risk you want. A rule of thumb will be increasing the amount of money market investments over time as you are growing old. However, if you have a huge chunk of money and do not like risk, money funds will give you a (mostly) safe harbor for the rest of your life, generating you a nice stable annual “salary”.

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