What Is Tax Free Money Market Fund?
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A tax free money market fund is a good mode to balance your portfolio particularly if it is equity heavy. In existing economic situation, there is a lot of uncertainty. So, it makes sense to put some money in debt funds like government securities and money market funds.
A money market fund is usually a mutual fund which invests its assets in short term debt instruments like cash or cash equivalent securities. These funds are usually used as short term investments until the time you have found a suitable option to invest your money. This is particularly good option in recent times when the investors are waiting for the markets to bounce back. Once the Bull Run starts, investors can take out this money from money market funds and invest them in equity funds or other high yielding avenues.
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.
At an initial look, no-one will decide to buy a taxable fund because to tax related reasons but the fact is that tax free funds have fewer yields than taxable funds. When comparing these funds, it is necessary that investor convert the tax free yield into equivalent taxable yield. The formula for this conversion is Taxable Equivalent Yield = Tax-Free Yield / (1 - Marginal Tax Rate).
There are a variety of tax free money market funds existing in market today. Most of them have similar returns so there is not much difference between them. A few names from good and reputed fund houses are Fidelity AMT Tax-Free Money Fund (FIMXX), Vanguard Tax-Exempt MMF (VMSXX), American Century Tax-Free MMF (BNTXX), and T. Rowe Price Tax-Exempt Money (PTEXX).
A money market fund is usually a mutual fund which invests its assets in short term debt instruments like cash or cash equivalent securities. These funds are usually used as short term investments until the time you have found a suitable option to invest your money. This is particularly good option in recent times when the investors are waiting for the markets to bounce back. Once the Bull Run starts, investors can take out this money from money market funds and invest them in equity funds or other high yielding avenues.
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.
At an initial look, no-one will decide to buy a taxable fund because to tax related reasons but the fact is that tax free funds have fewer yields than taxable funds. When comparing these funds, it is necessary that investor convert the tax free yield into equivalent taxable yield. The formula for this conversion is Taxable Equivalent Yield = Tax-Free Yield / (1 - Marginal Tax Rate).
There are a variety of tax free money market funds existing in market today. Most of them have similar returns so there is not much difference between them. A few names from good and reputed fund houses are Fidelity AMT Tax-Free Money Fund (FIMXX), Vanguard Tax-Exempt MMF (VMSXX), American Century Tax-Free MMF (BNTXX), and T. Rowe Price Tax-Exempt Money (PTEXX).
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