Mutual funds versus money market funds

Investors have a variety of pooled fund investment options, including mutual funds and money market funds, that can meet short- and long-term investment objectives. Individuals who invest in mutual funds accept a higher degree of risk, as mutual fund managers invest in long-term securities such as stocks and bonds. Money market mutual funds are focused on preserving principal, and fund managers invest in short-term Treasury securities to meet this objective. Mutual funds and money market funds also differ in terms of expense ratios and sales loads.

Individuals who purchase mutual funds pool their money with other investors to purchase shares of securities, including corporate stocks, bonds, municipal bond issues, or government treasuries. Mutual funds seek to outperform the market through active management investment strategies within the fund, and a team of professional fund managers manages each fund.

Because funds are actively managed, a cost is associated with investing in mutual funds. The majority of mutual funds carry a sales load either at the time of purchase or when the shares are redeemed, which is used to compensate the fund manager and the adviser or broker who recommended the investment. Funds also carry expense ratios that cover advertising, administrative, and other ancillary expenses generated by the fund, which can be higher than the costs of passively managed investments.

Money market funds are a subset of mutual funds. While mutual funds invest in long-term securities, money market funds are restricted to investment in government treasuries and other low-risk, liquid investments. Money market accounts aim to hold the net asset value of shares at $1, creating a steady but relatively low return for investors.

Expense ratios are low for money market accounts because they are not as actively managed as equity or fixed-income mutual funds. Similarly, sales loads required to purchase money market funds are either low or nonexistent. Money market funds are often used as a holding account for funds soon to be invested, or for money generated from the sale or redemption of other securities.