Provided by
Michael Oana
mjo@teamoana.com

Michael Oana is the Chief Investment Officer with Team Oana Investment Advisors. Team Oana is a locally owned boutique investment firm specializing in helping conservative investors. Mr. Oana's Toucan Talk column appears bi- weekly in The Columbia Star.

If you had to guess, would you say the money market was located in:

A. Wall Street B. Paris C. London D. Hong Kong

If your answer was any of the above choices, you'd be wrong. Actually, the money market is not in one particular place; in fact, it's not really one market at all. The money market is created by a group of local governments, the federal government, banks, and large corporations.

What do all of these entities have in common? They all issue some type of short-term obligation - meaning a maturity of less than a year, usually 90 days or less.

When such institutions need cash for a short period of time, they borrow by issuing money-market instruments, such as the federal government's Treasury bills (trading in the secondary market), corporations' commercial paper, and the negotiable certificates of deposit (CDs) issued by large, creditworthy banks.

Who buys these securities? Generally, they're purchased by wealthy investors, as well as banks and large corporations that can afford to pay $10,000 to $1 million for a Treasury bill, or $100,000 to $10 million for a negotiable CD.

Other, less widely traded short-term credit instruments include bankers' acceptances (drafts constituting a bank's promise to pay upon maturity); repurchase agreements, or "repos" (short-term buy/sell arrangements involving any money-market instrument in which there is an agreement that the security will be resold to the seller on a specific date, often the next day, at an agreed-upon price); and Eurodollar CDs (dollar-denominated certificates of deposit sold by foreign branches of U.S. banks or by foreign banks).

While many of these instruments are beyond the reach of the average investor, money-market mutual funds offer these investors the opportunity to become involved in this fast-paced market. Though not risk-free, money-market funds have a record of relative safety, because short portfolio maturities typically lower a fund's risk level. A bank or corporation whose securities are sold in the money market is not likely to default in such a short time. Also, no one security may make up more than five percent of a fund's total assets.

Another key attraction of the money market for both large and small investors is the relatively low risk of capital loss resulting from interest-rate fluctuations. Since a money-market instrument can be redeemed at full face value in days, weeks or months, the usual market risk caused by these fluctuations is generally reduced. Keep in mind, an investment in a money-market fund is neither insured nor guaranteed by the U.S. government. There can be no assurance that the money-market fund will be able to maintain a stable net asset value of $1.00 per share.

Investors can choose from three basic types of money-market funds: general, government-only and tax-exempt funds. Knowing which fund is best for potentially meeting their investment goals can help investors choose from the hundreds of funds available.

General Funds. These funds invest in corporate, bank, and government obligations. Usually, these are the money-market funds most frequently advertised Government-Only Funds. These funds limit their investments to U.S. government or federal agency securities. Because some or all of the securities may be backed by the full faith and credit of the government, they are customarily less risky, and usually have lower yields, than general funds. Of course, the government guarantee only applies to the underlying securities of the money-market fund's portfolio, not to the fund's share price.

Tax-Exempt Funds. Because these funds invest in short-term tax-exempt municipal bonds, the income derived from them is generally free from federal tax, but not necessarily from state and local taxes. Because of the tax advantages, yields from tax-exempt funds are generally much lower than those from regular money-market funds. A sub-category of this group designed for residents of high-income-tax states like New York, California and Massachusetts invests in short-term tax-exempt municipal bonds of these states - which are generally free from federal, state and local taxes for residents of the states and localities that issue them. Some investors, however, may be subject to the federal Alternative Minimum Tax (AMT).

Are money-market funds suited to your investment strategy? Talk with your financial advisor about this and all other matters affecting your financial future.

Generally, CDs may not be withdrawn prior to maturity, but when permitted would incur an interest penalty. CDs are FDIC-insured up to $100,000 per institution. CDs may be issued by out-of-state institutions.

Team Oana Investment Advisors, Inc., is an independent company with securities offered through Summit Brokerage Services, Inc. Member NASD & SIPC.