Money market funds are excellent options for short-term investments with high liquidity. These ETFs often put their money into liquid assets like cash or highly rated debt securities. These funds' original intent was to provide investors with a stable $1.00 share price, current income, and liquidity.

The Vanguard Cash Reserves Federal Money Market Fund (VMMRX) is a good option for investors who don't mind the possibility of redemption limitations and liquidity fees in times of financial stress. You should keep reading to learn more about this fund and decide if it is right for your investment strategy.

What Exactly Are Money Market Funds?

A money market fund, distinct from a money market account, invests in cash and high-quality, ultra-short-term assets with similar liquidity and safety. The standard goal of a money market fund is to produce current income without compromising on liquidity or the share price of $1.

Rather than using money market funds as a location to park their savings or the proceeds from a deal, most investors only keep their money there temporarily. To avoid confusion, Vanguard and other brokerages and mutual fund providers sometimes refer to money market funds as "settlement funds."

Understanding Vanguard Cash Reserves

One of the world's largest stock and fixed income managers, The Vanguard Group, offers the Vanguard Cash Reserves Federal Money Market Fund Investor Shares as a conservative investing alternative. This fund targets regular investors and is taxed as ordinary income.

It began operations in 1989 and has $88.5 billion in assets as of July 31, 2022. The 155 securities in the portfolio are diverse. Additional initial $3,000 are valued at $1 per share. There are no costs associated with buying or selling, and the expenditure ratio is under 0.10%. 2 The bulk of the corpus is put into the following investments:

• Purchase and Sale Agreements: 54.90%
• The interest rate on U.S. Treasury bills is now 6.90%.
• Obligations to the United States Government: 38.20%

Who Should Make The Investment?

Because it holds so much cash, the Vanguard Cash Reserves Federal Money Market Fund is a very liquid investment vehicle. The average term of the securities owned by the fund is just 36 months, making them extremely liquid. 2 Because of this, the fund is great for those with low-risk tolerance.

This is an excellent investment option for those who need regular access to their funds. In other words, the fund is still suitable for those with a longer time horizon. These long-term investors may utilize VMRXX as a cash substitute for some riskier assets in their portfolios.

Consequences of VMRXX Exposure

You'll unlikely lose your investment's principal unless there's a global economic meltdown. The fund's yield will climb in tandem with the U.S. economy's rise in short-term interest rates, as the fund is designed to track these rates.

The monthly dividend and minimal initial commitment make VMRXX a promising investment option, but cryptocurrency is not without its risks. Some of the most widespread threats to your investment in the fund are as follows:

Credit hazard

If issuers cannot make interest or principal payments, the security price may fall. However, the fund's investment in high-quality assets makes this risk minimal.

Income uncertainty

The fund's distributions would be reduced if interest rates dropped. This is due to the fund's heavy reliance on variable short-term interest rates. Because short-term rates tend to change over shorter periods, investors should be prepared for more income risk.

Industry Risk

Commercial paper and bonds comprise a relatively modest proportion of the fund's holdings. Therefore any issues or events that negatively impact a particular industry will affect the fund's overall performance. If the fund has put its money into securities issued by the financial services industry, it will be vulnerable to the dangers of the sector.

Are Money Market Mutual Funds Dangerous?

No. Money market funds, on the other hand, are quite reliable. This is reflected in the funds' poor returns. Money market funds strive to maintain a share price of $1 at all times. Only during extreme financial stress have money market funds fallen below this value , but they have always bounced back swiftly.

Is A Money Market Account the Same As A Money Market Fund?

On the other hand, a money market fund is a type of mutual fund that only invests in money market securities like short-term treasuries. Those who keep their money in an FDIC-insured bank account, known as a money market account, earn interest on their funds.