A money market fund is a form of mutual fund that invests in highly liquid assets. The investment avenues in which a money market fund invests include debt-centric instruments that have a high credit rating, securities that are cash equivalent, and cash. The investment instruments in which a money market fund invests have a short-term maturity period (lower than 13 months).

Due to investment in these avenues, money market funds come with low risk but offer high liquidity. This feature makes a money market fund one of the most preferred investment options among the different types of liquid assets. As a result, you should invest in a money market fund if only you have an investment objective for a short period, a low tolerance when it comes to volatility, or if you want the investment to have high liquidity.

Now that you have a brief overview of money market funds, explained ahead are the different forms of money market funds. They are categorized into different assets, depending on the period of maturity, classification of invested assets, and other characteristics.

• Prime money fund
  This fund invests in commercial paper of non-treasury assets, such as those that are issued by government-sponsored enterprises, government agencies, and corporations. It also invests in floating-rate debt.
• Treasury funds
  These funds invest in treasury funds of the country. The country’s treasury funds come with the lowest risk. However, they offer lower yield as compared to other kinds of money market funds. In addition, these funds are tax-free. Treasury funds are a suitable investment avenue if you have a low-risk appetite and wish to earn a percent or two more in return than what you would in an interest-yielding bank account.

• Government and agency funds
  These funds make investments in bonds and notes of the federal government agencies that are guaranteed by the congress and treasury. These funds also invest in mortgage-related securities, emerging markets, and foreign markets. In comparison to treasury funds, government and agency funds are slightly riskier; however, these offer higher returns and are tax-free.
• Tax-exempt money fund
  Tax-exempt money funds are classified into National Municipal Funds and State Municipal Funds. In National Municipal Funds, a minimum of 80% of the fund’s assets are invested in municipal securities and the interest is exempted from federal income tax. Similarly, in the case of State Municipal Funds, a minimum of 80% of the fund’s assets are invested in municipal securities and the interest is not liable to state and federal personal income taxes.

Among the other different types of liquid assets, money market funds have some key benefits. They can be easily liquidated, have low risk, and provide higher returns than most bank accounts. Therefore, you must consider investing in these funds if you are looking for decent returns and low risk.