| The safest mutual funds have a great track | | | | money market funds and bond or income funds, |
| record for safety, and they pay interest in the | | | | including short-term income funds. |
| form of dividends. They have a share price that is | | | | All bonds and income funds come with interest |
| pegged at $1, which does not fluctuate like the | | | | rate risk. In simple terms this means that if you |
| share price of other mutual funds. Trillions of | | | | hold them you will lose money if interest rates in |
| investor dollars have been safely invested in | | | | the economy go up. This risk is highest for |
| these money market funds over the years. | | | | long-term bonds and funds, and much lower for |
| In 2008-2009 millions of investors took major | | | | quality short-term bonds and short-term income |
| losses in mutual funds, and many of them made a | | | | funds, which are the safest bond funds. |
| false conclusion: that mutual funds in general are | | | | The advantage of bonds (and funds that invest in |
| risky investments. This is not the case. Stock | | | | them) is that they pay higher interest (dividends). |
| funds involve considerable risk, and longer-term | | | | Long-term income funds pay the most, and |
| bond funds come with moderate risk. | | | | short-term bond funds pay the least. Generally, |
| Unfortunately, many investors had most of their | | | | these short-term income funds pay a bit more in |
| investment assets in stock funds in 2007, and | | | | dividends than money market funds. |
| continued to hold them as the stock market | | | | The traditional money market fund (MMF) invests |
| tumbled. | | | | in high quality short-term IOUs issued by the |
| High quality short-term bond funds involve less | | | | federal government (T-bills), banks and other |
| risk and money market funds (MMFs) are at the | | | | major corporations. This short term debt is of |
| top of the list for safe mutual funds. If you want | | | | very high quality and generally matures in a |
| safety and/or are putting money aside for a | | | | matter of weeks or months. This arena of |
| shorter-term goal like college funding or to | | | | investments is referred to as the money market. |
| accumulate a down payment to buy real estate, | | | | Because of the short term nature of these |
| consider investing in both of these fund types. | | | | securities, an MMF is continually replacing those |
| If you want to add safety to your retirement | | | | securities that have matured with new ones at |
| portfolio, hold these funds along side your stock | | | | current competitive interest rates. Hence, as |
| funds and other investments. | | | | interest rates go up, so do the dividends for the |
| Both bond funds (also called income funds) and | | | | fund. When interest rates fall, fund dividends do |
| money market funds pay interest in the form of | | | | as well. |
| dividends. These dividends are normally subject to | | | | Due to the short term nature of their holdings, |
| income tax unless the fund is held in a | | | | these funds have virtually no interest rate risk; |
| tax-qualified plan (like a 401k or IRA). In this case | | | | and since their holdings are of such high quality |
| the income from dividends is either tax deferred | | | | there should be very little investment risk to be |
| or tax free. | | | | concerned with. |
| There are also tax-exempt (tax-free) income | | | | You can earn competitive interest rates by simply |
| funds and MMFs designed for folks in higher tax | | | | holding an MMF, with very little risk of losing |
| brackets. These invest in municipal securities | | | | money. |
| issued by government entities like the State of | | | | In the early 1980's investors earned double digit |
| Ohio. The interest paid to investors (dividends) is | | | | returns in money market funds because interest |
| free from federal income tax. | | | | rates were at historical highs. Unfortunately, |
| Traditional (taxable) money market funds and | | | | 2008-2009 ushered in a period of historically low |
| income funds invest in debt securities (IOUs) of | | | | interest rates, and MMF returns followed suite. |
| the federal government, banks, and other | | | | When rates rise, the dividends for these safest of |
| corporations. Now, here's the difference between | | | | mutual funds should as well. |