A tax free money market fund is a good mode to balance your portfolio particularly if it is equity heavy. In existing economic situation, there is a lot of uncertainty. So, it makes sense to put some money in debt funds like government securities and money market funds.
A money market fund is generally a mutual fund which invests its money in short term debt securities like cash or cash-like instruments. These funds are generally used as short term investments till the time you find a good option to invest your money. This is specifically a good option in current times when the investors are waiting for the markets to bounce back. Once the Bull Run starts, traders can take out this money from money market funds and put them in equity funds or other high return securities.
There are many kinds of money market securities like Certificate of deposits, U.S. Treasuries, repurchase agreements, commercial paper, etc. The money market funds come in two types which are taxable funds and tax free funds. As the name implies, the taxable funds are taxed when they get matured while the tax free money market funds are not.
When you see them first, you will certainly choose a tax free fund instead of table fund due to obvious tax related reasons. But the fact is that tax free funds have lower returns than taxable funds. When you compare these 2 funds, you should look at the return on investments as well. Usually, the returns are higher in taxable funds. You can use the formula (Taxable Equivalent Yield = Tax-Free Yield / (1 - Marginal Tax Rate)) to find the difference.
There are various tax free money market funds available in market today. Most of them have same yield therefore there is not much difference between them. A few names from reputed financial institutions are American Century Tax-Free MMF (BNTXX), Vanguard Tax-Exempt MMF (VMSXX), Fidelity AMT Tax-Free Money Fund (FIMXX), and T. Rowe Price Tax-Exempt Money (PTEXX).
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Article: What Is Tax Free Money Market Fund? Author: Craig Lipper Publication Date: 2009-10-19 Total Views: 339 Word Count: 357 Category:Home /
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