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Money market mutual funds and other short-term investment pools

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Disciplines
  • Economics
  • Political Science

Abstract

Instruments of the Money Market Page 156 The information in this chapter was last updated in 1993. Since the money market evolves very rapidly, recent developments may have superseded some of the content of this chapter. Federal Reserve Bank of Richmond Richmond, Virginia 1998 Chapter 12 MONEY MARKET MUTUAL FUNDS AND OTHER SHORT-TERM INVESTMENT POOLS Timothy Q. Cook and Jeremy G. Duffield Short-term investment pools (STIPs) are financial intermediaries that purchase large pools of short-term financial instruments and sell shares in these pools to investors. Because it typically takes at least $100,000 to purchase most money market instruments, STIPs allow investors to gain access indirectly to money market yields with much smaller amounts of money than is possible through direct investment. STIPs also provide many investors greater liquidity, diversification, and a higher yield net of expenses than could be obtained by direct investment. The three major types of STIPs are money market mutual funds, short-term investment funds, and local government investment pools. Money market mutual funds are operated primarily by brokerage companies and mutual funds groups which sell shares in these funds to a wide variety of individual, corporate, and institutional investors. Short-term investment funds are operated by bank trust departments for their different accounts. Local government investment pools are typically established by individual state governments for their local governments. At the end of 1992, STIPs held over $700 billion in assets and played a significant role in the nation's money market. MONEY MARKET MUTUAL FUNDS Money market mutual funds (MMFs) can be divided into two categories: (1) taxable funds, which invest in securities such as Treasury bills and commercial paper that pay interest income subject to federal taxation, and (2) tax-exempt funds, which invest exclusively in securities that ar

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