Tax Free Money Market Fund
A tax free money market fund is a great way to balance your portfolio especially if it is equity heavy. In current economic scenario, there is a lot of uncertainty. Therefore, it makes sense to park some money in debt funds like government securities and money market funds.
A money market fund is essentially a mutual fund which puts its assets in short term debt instruments. These instruments are usually like cash or cash equivalent securities. These money market mutual funds are commonly used as short term investments till the time you are able to find a better option to invest your money. This is specially a good alternative in current scenario when the investors are waiting for the markets to improve. Once there is upswing in the market, this money can be withdrawn from money market funds and put back in equity.
There are various types of money market instruments like Certificate of deposits, commercial paper, U.S. Treasuries, repurchase agreement etc. The money market funds come in two varieties which are taxable funds and tax free funds. As the name suggests, the taxable funds are taxed during maturity while the tax free money market funds are exempted from tax.
When you see them first, you will certainly choose a tax free fund instead of table fund due to obvious tax related reasons. But the fact is that tax free funds have lower returns than taxable funds. When you compare these 2 funds, you should look at the return on investments as well. Usually, the returns are higher in taxable funds. You can use the formula (Taxable Equivalent Yield = Tax-Free Yield / (1 - Marginal Tax Rate)) to find the difference.
There are many tax free money market funds obtainable in market today. Most of them have similar returns therefore there is not much difference between them. A few names from good financial institutions are Vanguard Tax-Exempt MMF (VMSXX), Fidelity AMT Tax-Free Money Fund (FIMXX), American Century Tax-Free MMF (BNTXX), and T. Rowe Price Tax-Exempt Money (PTEXX). - 23222
A money market fund is essentially a mutual fund which puts its assets in short term debt instruments. These instruments are usually like cash or cash equivalent securities. These money market mutual funds are commonly used as short term investments till the time you are able to find a better option to invest your money. This is specially a good alternative in current scenario when the investors are waiting for the markets to improve. Once there is upswing in the market, this money can be withdrawn from money market funds and put back in equity.
There are various types of money market instruments like Certificate of deposits, commercial paper, U.S. Treasuries, repurchase agreement etc. The money market funds come in two varieties which are taxable funds and tax free funds. As the name suggests, the taxable funds are taxed during maturity while the tax free money market funds are exempted from tax.
When you see them first, you will certainly choose a tax free fund instead of table fund due to obvious tax related reasons. But the fact is that tax free funds have lower returns than taxable funds. When you compare these 2 funds, you should look at the return on investments as well. Usually, the returns are higher in taxable funds. You can use the formula (Taxable Equivalent Yield = Tax-Free Yield / (1 - Marginal Tax Rate)) to find the difference.
There are many tax free money market funds obtainable in market today. Most of them have similar returns therefore there is not much difference between them. A few names from good financial institutions are Vanguard Tax-Exempt MMF (VMSXX), Fidelity AMT Tax-Free Money Fund (FIMXX), American Century Tax-Free MMF (BNTXX), and T. Rowe Price Tax-Exempt Money (PTEXX). - 23222
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posted by X - Men @ 4:35 AM
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