Tax Free Money Market Fund
A tax free money market fund is a great way to balance your portfolio especially if it is equity heavy. In current economic scenario, there is a lot of uncertainty. Therefore, it makes sense to park 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 many tax free money market funds obtainable in market today. Most of them have similar returns therefore there is not much difference between them. A few names from good financial institutions are Vanguard Tax-Exempt MMF (VMSXX), Fidelity AMT Tax-Free Money Fund (FIMXX), American Century Tax-Free MMF (BNTXX), and T. Rowe Price Tax-Exempt Money (PTEXX). - 23167
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 many tax free money market funds obtainable in market today. Most of them have similar returns therefore there is not much difference between them. A few names from good financial institutions are Vanguard Tax-Exempt MMF (VMSXX), Fidelity AMT Tax-Free Money Fund (FIMXX), American Century Tax-Free MMF (BNTXX), and T. Rowe Price Tax-Exempt Money (PTEXX). - 23167
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