Expert: Paul Henneman - 12/30/2004

Question
What is the difference between money market accounts and funds?  How can I find a good account or fund?

good=
1. high interest rate
2. low risk
3. relatively free access to the money if desired.  For instance, if I invest x dollars.  How difficult would it be to take out some of it if I need to?

Answer
Louis,
  Thank you for your question! Your question is actually a tough one. There are few real rules in finance and investing, but one of them is that the higher the interest and investment offers, the higher the risk. So a high interest rate investment with low risk does not really exist. The main goal is for you to find the level of risk and return that you are comfortable with.
  Money market accounts are perfectly safe, with really no risk at all. However, the interest is small, the best money market accounts available currently offer just under 2% a year in interest. Inflation in the US is about this same level, so your money will not really grow at all in terms of buying power. It is a 100% safe place to park extra money if that is what you are looking for. It is easy to withdraw, a money market account works like a savings account. Most banks will give you checks and an ATM card to withdraw from the money market whenever you like, but there is a limit to how many withdraws a month you can make, usually about four. A money market fund that I like alot is www.NetBank.com  They offer one of the higest interest rates for this type of account, and are FDIC insured up to $100,000 in deposits. This means that if the bank fails for any reason, they are backed by the US government up to $100,000 for each account holder.
   There are many, many types of funds out there. This can earn you much more interest, but is also more risky. Mutual funds can on average earn about 10 to 20% a year. But you must be carefull in selecting a mutual fund, as some are much better than others. Also, some years will be very good, such as 2003 where many mutual funds earned 25% or more in interest. But some years will be bad, such as 2004 which was flat for many funds, or even 2001 and 2002 where most funds lost alot of their value. The risk becomes less the longer you are invested in a mutual fund. It is more likely that the funds will make money than lose money, so the longer you hold such an investment the more likely you are to increase your investment substantially. If you are looking for a short term investment, it is riskier.
  It is more difficult to take money out of a mutual fund. Some restrict this to once a quarter, others are more flexible. Perhaps the best way to research mutual funds is to visit www.morningstar.com  They are the oldest and best known online mutual fund research website. www.motleyfool.com is also very good.
  I also highly recommend that you purchase a copy of "Investing for Dummies", it is available at most major bookstores and at www.amazon.com  This book describes in depth each of these investments, as well as many others. With the information in this book, you could really make a decision on what type of risk you are willing to take in return for higher rewards. Also, you do not have to be fully invested in one type of investment. Most successful investors have many different holdings, some are very safe so that all of the investments are not lost in bad years, and some are more risky to take advantage of higher returns.  A general guideline is 50% in safe investments and 50% in higher risk, such as mutual funds or even stocks.
  I hope this helps! Please do not hesitate to follow up with me if I can be of any further service,

Sincerely,
Paul Henneman
President
ValuEngine, Inc.
www.ValuEngine.com
www.VEInstitutional.com