There are three basic asset classes — stocks, bonds and cash equivalents. Money market funds belong to the latter and offer investors three things: stability, liquidity and yield.

Stability — Money market funds are considered among the safest investments. Unlike stock and bond funds, money funds are structured (but not guaranteed) for their share price to stay even at $1. They aren't insured or guaranteed by the government (as are certificates of deposit and passbook saving accounts), but they are strictly regulated by the Securities and Exchange Commission. And they are restricted to investing in high-quality, short-term securities such as U.S. Government and municipal obligations and commercial paper. The maturities of money funds must be kept under 90 days and are generally much shorter. (The shorter the maturity, the less volatile the value.)

The money fund structure creates a relatively safe haven to store emergency reserves and to stockpile cash for large expenses. Money market funds are also a good parking place for cash that's between financial transactions. Finally they can be an important part of asset allocation and portfolio diversification, adding stability and balance to a growth-oriented portfolio.

Liquidity — By law, money funds stand ready to redeem your shares on any business day. Because money market funds have stable net asset values and no maturity dates, you can sell shares any time without incurring capital gains (or losses), or paying a penalty for early withdrawal. Money money market funds come with check writing or the company will issue you a check, wire the money to your bank or exchange it into another fund in the complex.

Yield — Until money market funds were introduced in the '70's, only the rich and institutional investors participated in the nation's money markets -- where the interest paid is higher than the passbook savings rate, but price of admission ranges from $10,000 to $1 million. As well, money market fund yields aren't set as they are for bonds and certificates of deposit. They fluctuate with the market.

The greatest strength of money market funds is also their biggest weakness -- stability. Except for reinvesting the dividend, they have no upward potential. That makes them vulnerable to inflation and a loss of spending power over time. Money markets are not for long term growth, they are for money you want to be immediately available. They're for "just in case".