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A money market fund mainly pays dividends that generally reflect short-term interest rates. Therefore, it limits liquidity risks and exposures to losses due to credit to the minimum.
A money market fund should not be confused with money market deposits accounts which are offered by Banks in the United States. Money market deposit accounts usually have limited transactions and higher minimum balance requirements than traditional saving accounts, but they also offer higher yields and interest rates. By law, money market deposit accounts are federally insured, but a money market fund is not. A typical money market fund is regulated under the law of US Securities and Exchange Commission’s (SEC) Investment Company Act of 1940, particularly Rule 2a-7.
Money market fund will usually invest in certificated of deposits (CD), government securities, and highly liquid and low risk investments. A typical money market fund will try to keep the net asset value (NAV) at a constant $1.00 per share. If the investments do not perform badly, money markets’ per share NAV should not fall below $1.00. Although the risks of loosing money in money market funds are low, they are still possible. Therefore, it is impossible for the investors to study a money market fund thoroughly before investing. The investors are recommended to read all of the available information.
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