... And Money Funds for the Cautious
Some time this year - and probably sooner than later - total assets in US money market funds will surpass $1 trillion, up from the current level of $975 billion.
Little wonder! With the stock and bond markets racked by turbulence, money market funds now stand out as havens for your dollars.
They are safe places with decent yields.
As of April 1, the average yield on taxable funds was 5.08 percent according to Michael Krasner, an analyst at IBC Financial Data Inc., Ashland, Mass. The average yield on tax-free funds, was 2.98 percent - barely matching inflation.
A money market fund is a mutual fund that aims for safety of principal, liquidity, and current income. It is sometimes called a cash fund. The fund buys short-term financial instruments, such as US government securities, certificates of deposits from banks, and AA-rated corporate debt.
A mutual-fund money-market account is not the same as a bank money market fund. Unlike the mutual fund, the bank funds are federally insured; but they pay much lower interest. Currently, the yield on taxable bank money market funds is about 2.63 percent, according to the Bank Rate Monitor, a newsletter.
Even though they are not federally insured, mutual fund money market accounts are considered extremely safe. No individual investor has yet lost money in such a fund, although in theory they could.
Unlike equity funds, the share prices of money funds do not fluctuate. Money funds maintain a constant share price of $1.
If you are buying into a fund, experts offer these tips:
1. Don't look only at yield. Some funds buy risky securities to boost yields.
2. Look for funds that are part of a fund family. This gives you greater flexibility to shift your money back and forth between stock and bond funds and your money market account. That can be useful when the market dives.
3. Be wary of funds that offer a "special" on operating expenses. A fund may waive operating fees for a year. But once the expenses are reinstated your yield may drop.
4. Check entry levels - $1,000 to $2,500 are common minimums - and minimum amounts for each check you write - often $250.
5. Pick the category of fund that best meets your personal needs. There are four basic types to choose from:
*Taxable funds: These are the most popular funds, holding around 84 percent of total money fund assets, according to IBC Financial Data. They pay the highest yields.
*US Treasury money funds: They invest all of their assets in short-term US Treasury issues. Since the securities are backed by the US government, they carry very little risk. They are usually exempt from state and local taxes.
*US government money funds: They are not the same as US Treasury funds. They often invest in federal agency issues, which are more turbulent than US Treasury issues. Interest is usually exempt from state taxes.
*Tax-free money funds. These funds invest in obligations of state, county, and local government agencies. Their interest is exempt from federal taxes (and exempt from state taxes on investments issued in your home state). They are best for people in high tax brackets.