How to Choose Best Money Market Funds?

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Money Market Funds
  A money market fund invests in a pool of short-term, interest-bearing securities. A money market instrument
  is a short-term IOU issued by the U.S. government, U.S. corporations, and state and local governments.
  Money market instruments have maturity dates of less than 13 months. These instruments are relatively stable
  because of their short maturities and high quality.
  Money market funds are most appropriate for short-term investment and savings goals or in situations where
  you seek to preserve the value of your investment while still earning income. In general, money market funds
  are useful as part of a diversified personal financial program that includes long-term investments.
Money Market Fund Risks
  The short-term nature of money market investments makes
                                                                          MAINTAINING A STABLE $1 SHARE PRICE
  money market funds less volatile than any other type of fund.
                                                                          IS A GOAL OF MOST MONEY MARKET
  Money market funds seek to maintain a $1-per-share price to
                                                                          FUNDS. HOWEVER, THERE IS NO
  preserve your investment principal while generating dividend
                                                                          GUARANTEE THAT YOU WILL RECEIVE
  income.                                                                 $1 PER SHARE WHEN YOU REDEEM
                                                                          YOUR SHARES.
  To help preserve the value of your principal investment, money
  market funds must meet stringent credit quality, maturity, and
  diversification standards. Most money market funds are required to invest at least 95 percent of their assets
  in U.S. Treasury issues and privately issued securities carrying the highest credit rating by at least two of the
  five major credit rating agencies. A money market fund generally cannot invest in any security with a maturity
  greater than 397 days, nor can its average maturity exceed 90 days. All of these factors help minimize risk.
  However, money market funds do not guarantee that you will receive all your money back. Money market
  funds are not insured by the U.S. government.
  “Inflation risk”—that is, the risk your investment return fails to keep pace with the inflation rate—is another
  concern if you choose to invest in money market funds or any other short-term investments. See page 17 for a
  broader discussion of inflation risk.

Types of Risk
   After a bond is fi rst issued, it may be traded. If a bond is traded before it matures, it may be worth more
   or less than the price paid for it. The price at which a bond trades can be affected by several types of risk.
   In t er es t R at e R isk : Think of the relationship between bond prices and interest rates as opposite ends
   of a seesaw. When interest rates fall, a bond’s value usually rises. When interest rates rise, a bond’s value
   usually falls. The longer a bond’s maturity, the more its price tends to fluctuate as market interest rates
   change. However, while longer-term bonds tend to fluctuate in value more than shorter-term bonds, they also
   tend to have higher yields (see page 16) to compensate for this risk.
   Unlike a bond, a bond mutual fund does not have a fi xed maturity. It does, however, have an average portfolio
   maturity—the average of all the maturity dates of the bonds in the fund’s portfolio. In general, the longer a
   fund’s average portfolio maturity, the more sensitive the fund’s share price will be to changes in interest rates
   and the more the fund’s shares will fluctuate in value.
   Cr edi t R isk : Credit risk refers to the “creditworthiness” of the bond issuer and its expected ability to
   pay interest and to repay its debt. If a bond issuer is unable to repay principal or interest on time, the bond
   is said to be in default. A decline in an issuer’s credit rating, or creditworthiness, can cause a bond’s price to
   decline. Bond funds holding the bond could then experience a decline in their net asset value.
   Pr epay men t R isk : Prepayment risk is the possibility that a bond owner will receive his or her
   principal investment back from the issuer prior to the bond’s maturity date. This can happen when
   interest rates fall, giving the issuer an opportunity to borrow money at a lower interest rate than the one
   currently being paid. (For example, a homeowner who refi nances a home mortgage to take advantage of
   decreasing interest rates has prepaid the mortgage.) As a consequence, the bond’s owner will not receive
   any more interest payments from the investment. This also forces any reinvestment to be made in a
   market where prevailing interest rates are lower than when the initial investment was made. If a bond
   fund held a bond that has been prepaid, the fund may have to reinvest the money in a bond that will have
   a lower yield.


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