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Money Market Fund

Invests in short term money market instruments such as T-Bills, and commercial paper, which is the corporate version of a T-Bill. Money market gives you a short-term parking lot for your money, and are generally very stable. If you’re putting money away for a down payment on a home in the next few months, this would tend to be the most sensible place to put your money. Or maybe if you came into an inheritance, and you wanted somewhere to park the cash until you figure out how to invest it, this can also work.

The unit value on Money Market funds is usually constant – the NAV is calculated each day and credited to owners of the fund units. Then, each month or quarter, whatever interest has accumulated is paid out. Since this is interest income, you can expect that it will be taxed the same as employment income if you hold money market in a regular savings account.

Benefits – short term stability

Drawbacks – Some money market funds have a fixed, guaranteed NAV, but others operate on what’s called a marked-to-market basis. If the interest rate changes quickly, the value of these funds might be affected.

Mortgage Fund
Invests primarily in residential mortgages. They pay a blend of interest payments and principal, usually monthly, sometimes quarterly and rarely annually. The mortgages themselves, at least in Canada, may be covered by the National Housing Act, which is administered by the Canada Mortgage and Housing Corporation. What this means for you, is that mortgage funds covered by this guarantee don’t get disrupted by the sort of mortgage crisis that crippled the US housing market and blew up the fixed income market. In the US, mortgage funds backed by the Government National Mortgage Association, or Ginnie Mae, have the US government’s guarantee. Other mortgage guarantors like Fannie Mae and Freddie Mac aren’t government-backed, so only the sustainability of those corporations keep the funds from melting down.

Benefits – Provides a relatively high income at a fairly low risk

Drawbacks – Depending on who is backing the mortgage, they can be fundamentally risky. Also, interest rate risk becomes a factor.

Bond Fund
Bond funds invest in government and corporate bonds/debentures, which we’ve already explained. You can actually get decent growth out of these funds, if the prevailing interest rates change.

Benefits – Relatively high income compared to mortgage funds and money market, and higher risk (usually considered moderate-conservative moderate).

Drawbacks – Element of risk and possible loss with this investment.

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