Function

When you and other shareholders pool your money in a prime money market fund, the funds managers use the collective balance to purchase short-term securities. Because prime money market funds look for quality, they typically hold a high percentage of highly rated government bonds and a very small percentage of corporate bonds or certificates of deposit. For example, the prime money market run by mutual fund giant Vanguard holds more than 80 percent of its assets in U.S. government-related bond and debt instruments.

FDIC Insurance

While bank money market accounts are insured under the Federal Deposit Insurance Corp. prime money market funds offered by mutual fund companies do not have this protection. If a mutual fund holding your prime money market account goes bankrupt, you will lose your investment. However, money market funds are regulated by the U.S. Securities and Exchange Commission, and the largest U.S. mutual fund firms are in little danger of going bankrupt; Forbes reports that holding a prime money market with a large fund firm is a safe investment.

Minimum Balances

Opening a prime money market fund account often requires an initial investment of $1,000 to $3,000, and these funds typically require you to maintain a minimum balance in your account. Depending on their individual regulations regarding prime money market accounts, fund firms can charge a fee when your balance falls below the minimum required.

Expenses

Prime money market funds carry annual expenses to pay for administrative and operating costs. These expenses are expressed as ratios, and the lower the expense ratio, the less fund managers extract from the total assets at the end of the year. Expense ratios for these funds hover in the range of 0.2 to 0.5 percent.

Check-Writing Privileges

References

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