Project on Money Market Mutual Funds.docx - Project on...

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Answer 1 : Money Market Mutual Fund is a form of mutual fund characterised by shorter maturity dates, higher liquidity, diversification and minimum credit risk. They invest in debt securities and is a type of fixed income mutual fund with low volatility. The income derived from such funds can be taxable or non-taxable based on the branch of securities the fund consists of. It is registered under the Investment Company Act and regulated by Rule 2a-7 under the Act. The U.S Securities and Exchange Commission (SEC) divides MMMFs into 3 main categories based on the investments in the fund, namely: (1) Government (includes United States Treasury) a. Only the Treasury: Cash and U.S Treasury securities constitute at least 99.5% of the total assets of the fund with 80% of these assets held by the securities in the U.S Treasury. b. Treasury: Cash and U.S Treasury securities and/or repurchase agreements constitute at least 99.5% of the total assets of the fund with 80% of these assets held by the securities in the U.S Treasury and/or repurchase agreements. c. Government: Cash and U.S Treasury securities and/or repurchase agreements collateralized by government or cash securities constitute at least 99.5% of the total assets of the fund with 80% of these assets held by the securities in the U.S Treasury and/or repurchase agreements. (2) Prime Under the U.S SEC (Rule 2a-7 of the Investment Company Act of 1940) applicable, the investment of assets is done in any eligible U.S Dollar denominated money market instrument including certificates of deposit, private instruments from domestic and international issuers, repurchase and reverse repurchase agreements, corporate notes and commercial paper. (3) Municipal a. State Municipal : Municipal securities constitute at least 80% of this fund’s assets and the interest is exempt from personal and federal income taxes. b. National Municipal : Municipal securities constitute at least 80% of this fund’s assets and the interest is exempt from federal income tax. Answer 2 : Advantages of MMMFs: 1. Provision of liquidity: MMMFs are highly liquid, tradeable and money can be easily retrieved from the fund. 2. Secure than most investments: The funds are less exposed to the market fluctuations as the federal regulations mandate them to make investments in securities with low risk and shorter maturity. Project on Money Market Mutual Funds
3. Tax benefits: As mentioned above, the interest payments from securities in some money market funds are usually exempted from federal income taxes and in certain cases, from state income taxes also and this results in excess income from tax benefits. 4. Duration is short: As compared to long-term bond fund investments, the maturity date of MMMFs is short and typically last only a few months, this significantly reduces the interest rate risk.

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