What Is 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 Once there is upswing in the market, this money can be withdrawn from money market funds and put back in equity.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 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 various tax free money market funds available in market today. Most of them have same yield therefore there is not much difference between them. A few names from reputed financial institutions are American Century Tax-Free MMF (BNTXX), Vanguard Tax-Exempt MMF (VMSXX), Fidelity AMT Tax-Free Money Fund (FIMXX), and T. Rowe Price Tax-Exempt Money (PTEXX). - 23196
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 Once there is upswing in the market, this money can be withdrawn from money market funds and put back in equity.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 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 various tax free money market funds available in market today. Most of them have same yield therefore there is not much difference between them. A few names from reputed financial institutions are American Century Tax-Free MMF (BNTXX), Vanguard Tax-Exempt MMF (VMSXX), Fidelity AMT Tax-Free Money Fund (FIMXX), and T. Rowe Price Tax-Exempt Money (PTEXX). - 23196
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posted by X - Men @ 4:36 AM
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