What Is Tax Free Money Market Fund?
Buying a tax free money market fund is a fine method to balance your portfolio particularly when there is more percentage of equity in the portfolio. In present scenario when there is economic slowdown happening, it makes sense to put money in debt instruments like government securities and money market funds which are considered to be more stable and equity.
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 different types of money market instruments in which money can be invested. These include commercial paper, U.S. Treasuries, Certificate of deposits, repurchase agreement etc. The money market funds are available in two flavors which are taxable funds and tax free funds. As you can make out, the difference between the two flavors is the way tax is deducted. The taxable funds are taxed during maturity while the tax free money market funds are exempted from tax.
At a first glance, nobody will decide to buy a taxable fund due to obvious tax related reasons but the fact is that tax free funds have lower yields than taxable funds. While comparing the two, it is important 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). - 23204
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 different types of money market instruments in which money can be invested. These include commercial paper, U.S. Treasuries, Certificate of deposits, repurchase agreement etc. The money market funds are available in two flavors which are taxable funds and tax free funds. As you can make out, the difference between the two flavors is the way tax is deducted. The taxable funds are taxed during maturity while the tax free money market funds are exempted from tax.
At a first glance, nobody will decide to buy a taxable fund due to obvious tax related reasons but the fact is that tax free funds have lower yields than taxable funds. While comparing the two, it is important 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). - 23204
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The author writes articles on various topics related to personal finance including best tax free money market funds and money market certificates.
posted by X - Men @ 4:29 AM
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