Money Market Funds

What
A money market fnd invests in high quality, short-term instruments and debt securities. The latter are loans sold by firms and governments to borrow money.

Pros
It is good alternative for investors who are looking for a stable, low-risk instrument with potentially higher returns - ranging between 1 and 2 per cent - than banks' savings deposits. Such funds often have no sales charge, although they come with a low management fee of about 0.5 per cent per year.

Cons
Although most money market securities are considered very low-risk investments, there is a possibility that the borrower will not repay the loan as promised. However, such a default risk becomes non-existent if it is a government bond. Also the interest rate earned usually does not exceed inflation.

Best for
You can use it to park money that you want to keep safe and available for spending in as short a time as a few months to as long as several years. Therefore, it is suitable for all age groups, particularly for retirees.

Still, not all money market funds are the same. When shopping for a money market fund, read the fund's prospectus and annual reports. Check to see what kinds of debt instruments the fund invests in.