A tax free money market fund is a great way to balance your portfolio especially if it is equity heavy.
In this 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 usually a mutual fund which invests its assets in short term debt instruments like cash or cash equivalent securities.
These funds are usually used as short term investments until the time you have found a suitable option to invest your money.
This is particularly good option in recent times when the investors are waiting for the markets to bounce back.
Once the Bull Run starts, investors can take out this money from money market funds and invest them in equity funds or other high yielding avenues.
There are various types of such instruments like Certificate of deposits, commercial paper, U.
S.
Treasuries, repurchase agreement etc.
These 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.
At a first glance, nobody will decide to buy a taxable fund due to obvious tax related reasons but the fact is that tax free funds have lower yields than taxable funds.
While comparing the two, it is important that investor convert the tax free yield into equivalent taxable yield.
The formula for this conversion is given below: 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).
In this 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 usually a mutual fund which invests its assets in short term debt instruments like cash or cash equivalent securities.
These funds are usually used as short term investments until the time you have found a suitable option to invest your money.
This is particularly good option in recent times when the investors are waiting for the markets to bounce back.
Once the Bull Run starts, investors can take out this money from money market funds and invest them in equity funds or other high yielding avenues.
There are various types of such instruments like Certificate of deposits, commercial paper, U.
S.
Treasuries, repurchase agreement etc.
These 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.
At a first glance, nobody will decide to buy a taxable fund due to obvious tax related reasons but the fact is that tax free funds have lower yields than taxable funds.
While comparing the two, it is important that investor convert the tax free yield into equivalent taxable yield.
The formula for this conversion is given below: 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).