Tax Exempt Money Market, also called a tax free money market, is a great way to secure your savings especially in a rocky economic environment. You must remember though, that due to the competitive nature of the money market, this form of investment has limited options and does not earn as high a rate of interest as a taxable investment would.
The interest earned on your investment is free from federal income tax and in some cases local tax. The Tax Exempt Money Market has proved to be very popular in areas that have high taxes and population, and where people are willing to invest only low amounts just to protect their savings from economic fluctuations.
Investors find this type of money market very popular because the minimum investment is quite low. Unlike many other investment instruments at this level, you can enter the tax exempt money market without having to invest large amounts.
One negative aspect about the tax free money market is that it does not provide the investor with many options. These funds usually invest in short term tax exempt entities which have a lower yield than taxable money markets. This results in low returns for the investor.
To understand this a little better, its good to know exactly what a money market is and how it operates. A money market is a mutual fund which invests in cash or cash equivalent instruments. The investments will be short term, highly liquid and have good credit quality. They can be certificates of deposit, treasury bills or commercial paper. All these are highly stable and this is what makes them so popular. The maturity period is an average of 3 months, but funds are accessible during this period.
Factors to consider before buying a Tax Exempt Marketing Fund
1. As with any other investment, whether tax free or taxable, it is important to first check the yield. The yield will tell you how much you can expect at the end of the investment period. Remember these are a low-risk investment so the yield may not be as high compared to taxable investment options.
2. In addition to that it is vital to ensure that the tax savings attached to the tax free market fund makes it meaningful to buy the fund instead of a taxable one.
3. Verify a few aspects which are common in any type of investment. These include things such as expense ratio (which should be lower), investment objectives of the fund and risk factors (both of which should be in line with your own).
4. Know the market environment too. Some tax exempt money market funds provide higher yield depending on the state of credit markets.
High-quality tax exempt money market funds include Rowe Price Tax-Exempt Money (PTEXX), Vanguard Tax Exempt, and American Century Tax Free MMF. These Money markets each have a different yield. So compare them carefully before deciding which one to invest in. They are all under regulation by the SEC.
In conclusion, a tax exempt money market is great place to invest your money and let it grow while still deciding which securities you will purchase. In addition to that, we are experiencing an unstable economic scenario. Thus, it is sensible to protect your money in government securities and money market funds.