Money Markets for Short-Term Growth
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Why should I use money markets for short-term investments only?
Chances are good that you've never heard your investment broker suggest a money market account or money market fund for a long-term investment of a large amount of cash. Why? While money market accounts and money market funds are both low-risk investments or accounts, they're also low-return, with rates hovering anywhere from less than 1% to about 2% at any given time. Returns this low do not offer enough growth opportunity to make them a worthwhile investment over the long term.
Good Uses for Money Markets
- Short-term, low-risk growth
- Money that needs to remain fairly liquid and not be exposed to liquidity risks: As interest rates go up, investments with low interest rates (like bonds) can be hard to sell. This subjects investors to liquidity risk.
- Money that you don't want locked into a low return (subjecting it to interest rate risk): When investors purchase investments like CDs, they're locked into a certain interest rate for a number of years and face penalties if they terminate before maturity. This subjects them to interest-rate risk.
Be sure to run some money market comparisons to see whether a money market deposit account or fund would better suit your needs and to find out which one has the better return history.