Money market funds

A money market mutual fund invests in short-term bonds issued by the U.S. government, large corporations, states and local governments, banks, and other rock-solid institutions. A money market fund is considered a conservative investment with little possibility of losing money; in fact, many investors and financial experts refer to money market funds as a cash equivalent, almost as safe and liquid as money in the bank.
Because money market investments are short-term (that is, bonds that are to be paid off within a few weeks or months), they closely reflect current interest rates. Most money market mutual funds are currently earning about 4% interest (computed as an annual growth rate).
During the early 1980s, when inflation and interest rates were both very high, money market funds earned over 10% annually. Such growth is unlikely to return unless economic conditions change dramatically.
You can invest in money market funds through a mutual fund company or a bank. In most cases, banks pay slightly lower interest rates than do mutual fund companies. Also remember that your money market investment through a bank is not federally insured, unlike ordinary bank deposits. A money market fund is a good place to keep money that you may need in a hurry. It’s also a handy parking place for money that you plan to invest somewhere, but you just haven’t decided exactly where.
For example, Joanne gets a larger-than-expected end-of-year bonus from the company where she works — $2,500. She can deposit the bonus check in a money market fund managed by a mutual fund companies. It will immediately begin earning about 4% interest. Over the next month or two, Joanne can take her time to research other investment opportunities. If she then decides to invest the bonus in a growth fund (for example), she can move the money from the money market fund into the growth fund simply by placing a call to the mutual fund company.