Money market performance is evaluated by determining how much an initial investment will grow to over a specified period of time at an assumed interest rate. A money market account can be evaluated against other investment options, such as a fixed annuity or certificate of deposit. Money market performance also can be evaluated against comparable money market funds offered at competing financial institutions.
Any investment's performance is based on the financial concept of the time value of money. Time value of money assumes that money is worth more now than in the future. According to the concept, money that is available today is worth more than the same amount in the future because of an increased ability to earn more money through interest over a period of time. Typically, an investment's potential earning power is determined by the length of time before maturity and the rate of return that the investment will receive.
Potential as well as actual money market performance is determined by calculating how much the initial investment will be worth at its scheduled maturity date. The investment option that produces the higher amount of money at the end of the specified time period is the better performer. Performance for a particular year during the overall time frame can be determined by calculating the amount that the initial investment is expected to be worth at the end of it. Often referred to as future value, the amount is equal to the initial investment plus its compound interest payments.
When evaluating money market performance, it is important to consider individual investment goals, the amount of the initial investment, whether there will be additional contributions, the amount of time until the money will be needed and the available interest rates on various investment products. Money market performance is usually less than that of other investment options because there is a lower risk involved. A longer period of investment and volatility equates to a higher amount of risk. The higher the risk that is involved in investing in a particular fund, the higher the rate of return and potential payout.
A fund's listed interest rate is a good indicator of its potential performance. Typically, funds that have higher interest rates outperform those with lower rates in the long term. In the short term, funds that have a disparity between interest rates can actually perform at the same level. The shorter the time required before maturity, the less likely there is to be a major difference between one fund's performance and that of another fund.