Vanguard Prime Money Market Fund
What is the Vanguard Prime Money Market Fund (NASDAQMUTUX: VSM XX)? The Vanguard Prime Money Market Fund was created to preserve an investor’s principal by sustaining a diversified portfolio of medium-size, short-term assets. The fund is designed to provide maximum diversification without the expense and the hassles of various certificates of deposit (CD) products. Diversification of funds is essential to avoid concentration of risk among individual securities within a managed fund.
The concept behind the fund is simple. In order to generate higher profit, investors must invest in stocks that pay high dividends. Because bonds and other common financial instruments have interest rates linked to market rates, there is a tendency for investors to concentrate their money on those instruments that offer the highest return. This tendency can lead to the creation of a stock portfolio with excessive concentration of risk, especially in the short term. The goal of the Vanguard prime money market fund is to reduce this risk by maintaining an appropriate balance of long-term assets, including both stocks and bonds, with short-term funds.
How does the prime money market fund maintains a balanced portfolio? The fund uses a combination of stocks and bonds to maximize return while minimizing risk. As an investor, you should know how the fund managers determine which assets to add to the portfolio. The fund managers look at various factors, including current market conditions, inflation, geographic growth and other economic factors, in order to determine which investments are the best investment prospects. The fund manager also considers the expected behavior of bond prices and how the various indices perform when these factors are changed.
A Review of the Vanguard Prime Money Market Fund
An important strategy employed by the fund is what is called a cash flow analysis. In this case, the money market funds are analyzed to find out where the maximum amount of cash is likely to be realized over time. This will then be applied to an appropriate investment strategy. For example, if the maximum return is expected to occur in five years, the investment strategy may include purchasing a number of CDs (which have a fixed rate of interest) and paying them off over a designated period of time, while using an appropriate combination of commercial paper money and government bonds.
An important feature of the Vanguard prime money market fund is what is called a diversification policy. In addition to having various investment strategies that focus on different areas, the fund also has what is called a sector strategy. With a sector strategy, new investors are provided with a variety of investments to choose from within a given area. For example, one may choose to purchase bonds from the oil and gas sector, gold from the metal sector, and equity from one specific industry. Each of these sectors will provide a different line of income depending on the conditions in the chosen sector at any given time.
Finally, the fund also provides a practice of frequent and rapid growth of its assets, known as a distribution practice. Through this practice, small regular dividends are granted to investors on a regular basis, as long as they remain within the fund’s target range of risk/reward. As with all mutual funds, the main purpose of these policies is to provide steady streams of income to investors so that they may be able to function normally and invest in other types of assets as they see fit. By having a diversified portfolio, new investors can avoid some of the common pitfalls associated with most short-term investment plans.