Fidelity Money Market Fund: A Smart Investment Strategy?

Money market funds are a type of mutual fund that invests in debt securities with short maturities and minimal credit risk. They are considered a low-risk, short-term savings alternative that provides easy access to your cash. Fidelity Money Market Fund (SPRXX) is one of the largest money market funds in the industry, with over $100 billion in assets. It is offered by Fidelity, a reputable company with a long history of success in the industry, known for its low fees and no minimum investment requirements. So, is the Fidelity Money Market Fund a great investment? Let's explore further.

What is a money market fund?

A money market fund is a type of mutual fund that invests in short-term, high-quality, low-risk debt securities. They are also known as money market mutual funds. Money market funds are intended to offer investors high liquidity with a very low level of risk.

Money market funds are open-ended funds, meaning they may sell unlimited shares to customers. The fund sells and redeems the shares at a price equivalent to the net asset value (NAV), which is calculated daily. The managers of money market funds always aim to keep their NAV fixed at $1 per share using special pricing and valuation conventions.

Money market funds are considered extremely low-risk on the investment spectrum. They are a useful and profitable place to put cash for a relatively short time frame, rather than keeping it in a standard savings account where it won't earn much interest.

Money market funds can be used as a place to park money temporarily before investing elsewhere or making an anticipated cash outlay. They are also used as settlement funds in brokerage accounts.

Money market funds are not the same as money market accounts (MMAs). Money market accounts are a type of savings account that is offered by banks and credit unions and is insured by the Federal Deposit Insurance Corporation (FDIC).

How does it compare to a savings account?

Money market funds are a type of mutual fund that invests in short-term debt securities with minimal credit risk. They are considered a low-risk, highly liquid investment option, providing easy access to cash. While money market funds are not insured by the FDIC, they are required by federal regulations to invest in short-maturity, low-risk investments, making them less prone to market fluctuations.

Comparing this to a savings account, which is a type of bank account that allows individuals to deposit and accumulate money while earning interest, there are several key differences to note:

Risk and Return:

Money market funds generally offer a higher return compared to savings accounts. For example, as of October 2024, the average yield for money market funds was 5.13%, while the average savings account yielded only 0.45%. This higher return comes with slightly higher risk, as money market funds are not FDIC-insured, whereas savings accounts are typically insured up to $250,000.

Liquidity:

Both money market funds and savings accounts offer high liquidity, providing easy access to funds. However, some money market funds may impose liquidity fees or limitations on redemption periods, while savings accounts generally allow instant access to funds through ATMs or bank counters.

Investment Objective:

Money market funds are designed for investors with a low tolerance for volatility or those seeking a more conservative investment option. They are often used for short-term goals, emergencies, or as a low-volatility allocation within an investment portfolio. In contrast, savings accounts are typically used for accumulating wealth over time, providing a safe and stable option for individuals to grow their money.

Fees and Expenses:

When considering money market funds, it is important to evaluate the expense ratio, which is a percentage of the fund's assets used to cover management and administrative fees. A lower expense ratio is generally preferable, as it maximizes the investor's return. Savings accounts may also have associated fees, such as monthly maintenance fees, which should be considered when choosing an account.

Investment Minimums:

Money market funds typically have minimum initial investment requirements, which can vary depending on the fund. Some funds may require a minimum investment of $1,000 or more, while others may have no minimum investment requirement. Savings accounts usually do not have minimum deposit requirements, allowing individuals to start saving with smaller amounts.

In summary, money market funds offer a higher potential return compared to savings accounts but come with slightly higher risk due to the lack of FDIC insurance. Both options provide high liquidity, but money market funds may have certain restrictions. Money market funds are suitable for investors seeking a conservative, low-volatility investment, while savings accounts are ideal for individuals looking for a safe and stable way to accumulate wealth over time.

What are the risks?

While money market funds are considered a low-risk investment option, there are still some risks to be aware of before investing. Here are some of the key risks associated with Fidelity Money Market Funds:

Credit Risk

Unlike bank certificates of deposit (CDs) or savings accounts, money market funds are not insured by the Federal Deposit Insurance Corporation (FDIC). This means that while money market funds invest in high-quality securities and aim to preserve the value of your investment, there is a risk of losing money. The fund cannot guarantee that you will receive $1 per share when you redeem your shares.

Inflation Risk

Due to the low-risk and short-term nature of money market funds, the returns tend to be lower compared to more volatile investments such as stock or bond mutual funds. This creates the risk that the rate of return may not keep up with inflation, resulting in a loss of purchasing power over time.

Liquidity Risk

Some money market funds may impose a fee upon the sale of your shares if it is determined to be in the fund's best interests. Additionally, institutional prime and institutional municipal money market funds are required to impose a mandatory liquidity fee if the fund experiences significant net redemptions in a single day.

Price Risk

The share price of a money market fund can fluctuate, and there is no guarantee that you will receive the same amount you originally invested when you sell your shares. The value of your investment may be higher or lower than your initial investment, depending on market conditions and the performance of the fund.

Foreign Exposure Risk

For funds that invest in foreign entities, there is a risk associated with doing business in other countries. Adverse political, regulatory, market, or economic developments in those countries can negatively impact the fund's performance.

Financial Services Exposure

Changes in government regulations, interest rates, and economic downturns can significantly affect issuers in the financial services sector. This includes changes in the price of their securities or their ability to meet payment obligations.

It is important for investors to carefully consider these risks and evaluate if Fidelity Money Market Funds align with their investment objectives, risk tolerance, and financial goals. Conducting thorough research and seeking professional advice before investing is always recommended.

What are the different types of money market funds?

Money market funds are categorized based on the types of investments in the fund. The US Securities and Exchange Commission (SEC) defines three categories of money market funds based on the investments of the fund: government, prime, and municipal.

Government Money Market Funds

Government money market funds invest in cash, government securities, and repurchase agreements that are fully collateralized by cash or government securities. Treasury Funds are also included in Government Money Funds, which invest in standard US Treasury-issued debt securities, such as Treasury bills, Treasury bonds, and Treasury notes. These funds are extremely safe and well-suited for investors with a low-risk tolerance.

Prime Money Market Funds

Prime money funds invest in floating-rate debt and commercial paper of non-Treasury assets, which may be issued by corporations, US government agencies, and government-sponsored enterprises. Prime money market funds have historically offered higher yields than government money market funds.

Municipal Money Market Funds

Municipal money market funds, also known as tax-exempt money funds, invest in municipal securities whose interest is exempt from federal income tax and, in some cases, state income taxes. These funds are suitable for investors in a higher tax bracket or those living in high-tax states.

Retail and Institutional Money Market Funds

The SEC further classifies prime and municipal funds as either retail or institutional, depending on the type of investors in the fund. Retail funds are available to individual investors due to their small minimum investment amounts, while institutional funds target institutional money with a high minimum investment amount, often $1 million.

How to choose a money market fund

Money market funds are mutual funds that invest in debt securities with short maturities and very low credit risk. They are considered low-risk, short-term savings alternatives that provide easy access to your cash.

Yield

Compare the fund's yield to others in the industry to ensure you're getting a good return on your investment.

Expense Ratio

Funds charge an expense ratio, which is deducted from your investment returns. A lower expense ratio is generally better for investors, as it means higher returns.

Type of Fund

Money market funds are typically divided into three categories: government, prime, and municipal. Government funds invest in cash, US Treasury securities, and repurchase agreements. Prime funds invest in a broader range of securities, including government and corporate debt. Municipal funds invest in tax-exempt securities and are attractive for those in high tax brackets.

Other Fees

Be mindful of additional fees charged by brokers when buying and selling money market funds. Some may charge mutual fund commissions, while others may have fees for specific fund families.

Size of the Fund

Larger funds tend to have deeper pockets and more shareholders, which can provide better stability during financial crises. They also tend to offer better service and fewer limitations on access.

Credit Risk and Volatility

While money market funds are considered low-risk, they are not FDIC-insured like bank deposits. There is a chance of losing money, and credit risk should be considered, especially for prime funds that invest in corporate debt.

In summary, when choosing a money market fund, it's important to consider the yield, expense ratio, type of fund, additional fees, size of the fund, and the associated credit risk and volatility. By evaluating these factors, investors can make informed decisions about which money market fund best aligns with their investment objectives and risk tolerance.

Frequently asked questions