Cary, NC — Today, there are many funding vehicles for those trying to accumulate money for a child’s education – stocks, bonds, mutual funds, Certificates of Deposit, annuities, or insurance products. All of these are good choices for accumulating funds, but when the time between deposit and demand is short, many find that money market mutual funds best meet their needs.
What Are Money Market Mutual Funds?
Money market mutual funds are professionally managed portfolios of marketable securities. Marketable securities are short-term (one day to one year) debt obligations, such as Treasury bills, certificates of deposit, and commercial paper that can be easily converted into cash.
Professional money managers pool the assets of thousands of investors with similar short-term goals, allowing them to develop the portfolios. This allows the money market mutual funds to maintain liquidity and offer competitive yields and often-low transaction costs.
If college bills are expected in less than two years, money market funds may provide the right answer. Even though an investment in a money market mutual fund is not insured by the Federal Deposit Insurance Corporation or any other U.S. government agency, they do offer many features and benefits to the short-term investor.
The Up Side
- Professional Management. Experienced money managers make the important buy/sell decisions.
- Liquidity. Money can be accessed conveniently via check, phone or mail request.
- Stability. Although not guaranteed, money market mutual funds strive to maintain a constant value of $1.00 per share, by investing in short-term marketable securities.
- Flexibility. Monthly dividends can be paid in cash for student expenses or reinvested into the fund for future needs.
- Diversification. Fund managers may invest in marketable securities issued by a large number of companies or various governmental entities thereby reducing risk.
Although money market funds seek to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in these funds.
The Down Side
You should also be aware that money market mutual funds also have disadvantages:
- Short-term interest rates tend to be lower than long-term interest rates. If your college funding needs fall beyond two years, other, potentially higher-yielding investments may be more appropriate.
- Earnings are taxable unless invested in a tax-exempt money market fund or some other form of tax advantaged account. Many fund families offer both taxable and tax-exempt money market funds. Be sure you invest in the appropriate fund for you.
Uses for Money Market Mutual Funds
Money market mutual funds can be used in at least two ways by parents who are funding college expenses.
One way is when school enrollment is approaching. Parents investing in both long-term growth mutual funds and income-producing mutual funds may wish to help stabilize their accounts by transferring all or part of their dollars to a money market fund. This may help reduce share fluctuation or partially stabilize the portfolio to help meet predictable expenses.
Another way is when college students are finally enrolled. The need may arise to meet regular expenses, such as room and board, books, travel, and clothing. A money market fund allows instant access to money with check-writing privileges offered by most fund companies, while earning potentially higher interest rates than the average checking account.
Stability, Income and Accessibility
Money market mutual funds are a good, short-term option for parents and students to consider for college education funding. They provide relative stability, income and accessibility when such features are most needed. Don’t overlook the money-market option in your family’s education funding strategy.
Before investing, you should carefully consider a fund’s investment objectives, risks, charges, and expenses. Contact your financial professional to obtain a prospectus containing this and other information. Read the prospectus carefully before investing.
A mutual fund’s share price and investment return will vary with market conditions, and the principal value of an investment when you sell your shares may be more or less than the original cost.
Story by Raj Satsangi, Principal Financial Group: firstname.lastname@example.org; 919-610-2712. Photo of Hunt Library at NC State by Hal Goodtree.