Retail Money Funds
Mutual fund money market accounts, also called money funds, are different than the money market accounts offered by FDIC-insured banks. Technically, money funds are a type of mutual fund. Money funds can be purchased directly from mutual fund companies or purchased inside a brokerage account. Similar to a bank checking account or money market account, many money funds offer checkwriting and online transfers. Money funds are required by SEC regulations to hold short-term debt obligations and cash instruments in their portfolio with a weighted average maturity of 90 days or less. Yields on money funds vary based on portfolio holdings and market conditions. Historically, money funds have been able to maintain a $1 net asset value and prevent any loss of principal by investing in high-rated commercial paper, government-backed financial instruments, and U.S. Treasury securities. Money fund assets invested before September 19, 2008 may be guaranteed by the Treasury Department for participating funds.
Money Funds Update
Yields on money funds remain well below 1%, with a majority funds offering 7-day effective yields below 0.10%. Yields have crept up slightly in the last month, but still have a long way to go before they compare favorably with the best bank money market account rates. The highest yields posted on the MoneyRates.com list of money funds are the TCW Money Market Fund and the PayPal Money Market Fund, managed by Barclays Global Investors. The TCW Money Market Fund is offering a 0.24 percent yield and the PayPal account is currently yielding 0.16 percent with a minimum deposit of only $1 for new investors. Unlike most money funds, the PayPal Money Market Fund has a maximum account balance, currently set at $100,000. The increase in money fund yields is expected to continue, although slowly, as funds start to reinvest some of their securities at better rates of return.
Millions of dollars have been withdrawn from money funds this year by investors, in part due to increased confidence in the stock market. Another contributing is the higher rates that can be earned on CDs and savings accounts. In some cases, an investor parks money in a bank money market could receive 100 times more income than an investor who has funds in a mutual fund money market account. A rate disparity this great is very hard for a savings investor to ignore. The biggest advantage for an investor holding cash in money funds today is the price stability in comparison to other types of fixed-income securities. Bonds, US Treasury securities and bond funds can lose value as interest rates increase. Money funds are designed to maintain price stability with a $1 net asset value. This could be very important in the future if interest rates increase rapidly. Despite the near zero percent yields, money funds can be a strategic part of some investment portfolios.
Yields on Money Funds
The money funds listed below rank in the top third of all similar funds in terms of asset size and have expense ratios of less than 0.75 percent. The yield quoted is the 7-day effective yield net of expenses, which includes the compounding effect of dividends, and is a better direct comparison to the annual percentage yields (APYs) that are frequently quoted by banks. Some yields may include subsidies from mutual fund companies to keep their yield at or above 0 percent. Check with the mutual fund company directly for the most current yield and further information on specific funds.
Schwab Value Advantage Fund 0.01%, minimum $25,000
Wells Fargo Advantage Money Market Fund 0.01%, minimum $2,500
HighMark Diversified Money Market Fund Retail 0.07% minimum $1,000
Touchstone Money Market Fund 0.01%, minimum $2,500
Fidelity Cash Reserves 0.11%, minimum $2,500
Putnam Money Market Fund 0.06%, minimum $500
TCW Money Market Fund 0.24%, minimum $2,000
Vanguard Prime MMF 0.13%, minimum $3,000
Dreyfus Liquid Assets Money Market Fund 0.00%, minimum $2,500
American Century Premium Money Market Fund 0.01%, minimum $2,500
Fidelity Money Market Fund 0.08%, minimum $25,000
Fidelity Select Money Market Portfolio 0.18%, minimum $2,500
TIAA-CREF Money Market Fund 0.00%, minimum $2,500
RBB Money Market Fund 0.08%, minimum $1
Calvert Social Investment Money Market Fund 0.01%, minimum $1,000
PayPal Money Market Fund 0.16%, minimum $1
Western Asset Money Market Fund Class A 0.06%, minimum $1,000
Merrill Lynch CMA Money Fund 0.01%, minimum $2,000
Ivy Money Market Fund 0.02%, minimum $1,000
American Century Prime Money Market Fund 0.01%, minimum $2,500
Dreyfus BASIC Money Market Fund 0.00%, minimum $25,000
Oppenheimer Money Market Fund 0.01%, minimum $1,000
News About Money Funds
Assets in money funds increased $3.53 billion according to the most recent report from the Investment Company Institute. Total fund assets grew to $2.822 trillion, largely due to a strong inflow of institutional funds. Total money market mutual fund assets now stand at just over $2.82 trillion. In comparison, in early 2009, investors held over $3.8 trillion. Why have investors fled from the high level of safety of money funds? The low yields on funds and the steady return of investor money back into the stock market in the last 18 months are two of the primary reasons. Money funds have also been hurt by the attractiveness of short-term Treasury bond funds, which have offered investors solid returns as bond prices have increased to record highs.
New rules from the Securities and Exchange Commission regulate how mutual fund companies can invest money for their money market funds. The new rules include a shorter average-weighted maturity date for portfolio holdings (from 90 days to 60 days) and stricter requirements regarding the level of safety of the assets that are held in money funds. In addition, starting in October funds will have to disclose their holdings every month on their website. The disclosure rule will make it easier for analysts to identify risk in funds like the exposure to commercial paper from Lehman Brothers that rocked the industry in September of 2008. The new rule will most likely lower the yields on money funds because managers will have less of an ability to take on riskier long-term investments in their funds to boost their 7-day effective yield. Even short-term certificates of deposit like six-month CDs and one-year CDs are likely to offer higher interest rates than money funds, which are now required to hold ultra-short investments which pay lower rates of interest.
Money Fund Insurance
Mutual fund giants, Fidelity Investments and Vanguard Group, are just two of the major companies who have joined the U.S. Treasury's emergency insurance program for money-market mutual funds which protects investors from losses on money deposited before September 19, 2008. The government program, designed to shore up confidence in the ability of mutual fund money market funds to maintain a $1 net asset value, has now reached over a 97 percent participation rate in the industry. The creation of the program has helped stabilize the money fund industry, which was reeling after the Reserve Primary Fund fell to 97 cents in the wake of the Lehman Brothers bankruptcy. The guarantee for investors is that assets of the Treasury Department, up to $50 billion, will be used to rescue any participating fund that falls below a $1 net asset value. Most fund companies have posted information on their website about their participation in the Treasury Department guaranty program.
Last Update: 8/26/10
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