The
Vanguard money market fund is a type of the fund offered by the Vanguard Group, which provides current income and at the same time maintains the liquidity and a stable share price of $1. The other fund type offered by the Vanguard group is Taxable Money Market Fund.
The money market mutual funds are neither insured nor guaranteed by any government agency or the Federal Deposit Insurance Corporation. Though the money market mutual fund intends to preserve the investment at $1 per share, the risk of losing money in such investments still persists.
The investors seeking interest income and a stable price should invest in the money market mutual funds. Also the investors trying to get liquidity or those who want a ‘parking place’ for the cash while waiting for long-term investments are also the ones who should invest in the money market mutual funds
The
Vanguard money market fund is designed with low tolerance for risk and the major risks that the fund may experience are – credit risk, income risk, manager risk and industry concentration risk. If there is any chance that the bond issuer will fail to pay the interest and principal in time, then it may cause a decline to the price of the bond and this is known as the credit risks. The income risk refers to the chance of the fall of fund’s income due to a falling interest rate. Since the money market fund’s income is dependent on the short-term interest rates, the income risk can be high. The manager risk refers to the bad selection of securities that may cause the fund to under-perform. The overall condition of the industry can also cause some risk to the money market fund that is termed as industry concentration risk. As the fund is investing more than 25% of its assets in the financial industry, some turmoil in the market can affect the fund gravely.
The strategy behind the
Vanguard money market fund is that it invests in the short-term and high quality money market instruments. The security to be invested in should be high-quality and that is determined if the security is rated in one of the two highest credit-quality categories by at least two nationally recognized rating services. The policies taken by Vanguard while investing the money market fund are – the fund reserves the right to invest in the repurchase agreements, it reserves the right to invest in floating rate securities and 50% of the fund’s assets can be invested in Yankee and Eurodollar obligations.