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Why Money Market Mutual Funds Are So Popular Right Now

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This is an excerpt from Dollar Scholar, the money newsletter where news editor Julia Glum teaches you the modern money lessons you need to know. Don’t miss the next issue! sign up on money.com/subscribe And join our community of 160,000+ scholars.

A few weeks ago, ahead of my first Eras Tour show, my TikTok “For You” page flooded with videos of Taylor Swift fans making jewelry. She has a song that references friendship bracelets, so it has become trendy to bring kindergarten-style bangles to her concerts and trade them with other fans.

That’s all it took. I headed to the Amazon and entered a fugue state. When I regained consciousness, I had paid $12 for a 5-pound box of pearls.

You read that right: FIVE. pound.

Do you know how many beads are in 5 pounds of pearls? Hint: It’s a lot. According to Google, 1 pound of pearls is equal to about 1,800 beads, so multiply that by five and you get 9,000. Yep, I have at least 9,000 beads in my tiny Brooklyn apartment.

In retrospect, 5 pounds of beads is a lot of beads, but I’m a sucker for a trend. Even in the world of personal finance – and right now, tons of people are investing in money market funds. They’re having a moment, and I want to know why.

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Why are money market funds so hot right now?

I called up Paul Dear, Vice President of Wealth Private Clients at advisory organization Empower, to get the scoop. Deer started with a definition: A money market fund is a type of mutual fund that invests in ultra-safe, cash-like products. (Notably, it is distinct from a money market account, which is basically a savings account.)

Money market funds — also called money market mutual funds — typically invest in short-term debt, such as U.S. Treasury bills, that are government-backed and less risky. They’re also super liquid, which means it’s “very easy to get your money in and out,” says Hiran.

And, yes, money market funds have been hugely popular lately. In July 2021, he had assets of around $5 trillion. this month, he passed away $5.8 trillion,

People have forced money into them; During one *one week* in March, people invested $129.3 billion in money market funds.

Deer says there are two main reasons for the floods.

The first is that interest rates in general are rising, thanks to the Federal Reserve. The Fed has been raising rates for nearly a year in an effort to reduce inflation. Over the past decade, interest rates have been so low that products like money market funds “haven’t been very exciting,” Deer says.

But with the Fed raising rates, “that environment has changed.” They have suddenly become very attractive, with average returns of around 4.6%.

The second reason is related to volatility and uncertainty.

In case you missed it, we saw the second and third largest bank collapses in US history in March with the implosion of Signature and Silicon Valley banks. These were regional banks, and there were very valid factors that led to their closure, but still, a lot of Americans got scared.

“It’s probably what puts a lot of people on edge about what they’re doing with their cash or investments,” says Deer. “In a scared market environment, people will pull money out of the market and put it into investments like cash, whether it’s good for them or not.”

As I mentioned above, money market funds are generally considered safe. So when banks collapsed and the public had a crisis of confidence, investors sought them as a haven.

Rob Williams, managing director of financial planning at Charles Schwab, says it’s important to remember that money market funds, like other types of investments, have both pros and cons.

They can be a solid choice if I have a spending goal, says Williams, like if I don’t need to write a check today for a purchase, but soon.

But they are not suitable for every situation. For one, money market funds are not insured by the Federal Deposit Insurance Corporation, or FDIC, like many bank accounts. (They’re protected by the Securities Investor Protection Corporation, which operates similarly, but has had a handful of run-ins in the past.)

Their value also does not rise much and falls.

So while they may be a good place to store cash for a short period of time, they’re not going to provide much growth: “If inflation does what it’s done historically, and inflation is as hot as it gets, You are probably just losing purchasing power”, says Hiran.

Williams suggests using money market funds as part of a larger strategy, perhaps as a stepping stone to the world of investing.

Once I’ve learned to pay my bills reliably, manage a bank account, build an emergency fund, and start investing for retirement, I may want to move some of my money into these funds.

“How do you use each of these investment tools together?” He says.

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Bottom-line

Money market funds have a reputation for being safe. They’re hot right now because the Fed has made them more attractive by raising rates. This, combined with the fact that many consumers feel nervous about the banking system because of what happened in March, has led to large inflows recently.

Although there are disadvantages from a growth perspective, Williams says that “investors who don’t need any cash immediately but want to be protected and have a little income” can keep their money in money market funds.

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