- Money market funds invest mostly in high-quality short-term securities from the government and government agencies. Nontaxable money market funds invest in tax-exempt municipal bonds.
- Money market funds are generally considered a place to park cash for a short period of time, rather than a long-term investment.
- To determine if you would make more money with a taxable or nontaxable money market fund, calculate your tax-equivalent yield for a nontaxable money market fund with this formula: Tax-equivalent yield equals tax-free yield divided by (1 minus your federal tax bracket).
- Unlike money market accounts offered by banks, money market funds are not insured by the Federal Deposit Insurance Corp., but they are regulated and are generally considered safe investments.
- Depending on the types of bonds in the fund, part of the income earned from tax-exempt funds may be subject to the federal alternative minimum tax.