Money Market Funds

by Paul R. Ruedi, CFP®

 In the past when interest rates were practically zero and inflation was very low, there wasn’t much to be gained by holding an emergency fund in something other than cash. But with interest rates now several percent higher, for the first time in a long time the most liquid and least volatile investments are starting to produce a return that could make a difference to investors. One of those options, a money market fund, is a great option for investors who want to safely park their short-term savings or emergency funds.

A money market fund is essentially a mutual fund that invests in literal cash, investments that are almost equivalent to cash, and very short-term, high-quality bonds. This results in a fund that maintains a very stable value, but low returns. They are purchased just like a regular mutual fund through brokerage firms like Charles Schwab, Fidelity, etc. and banks. They are regulated by the SEC, and although they are often used as an alternative to a savings account, they are not insured for loss by the FDIC like a savings account.

Money market funds are priced at a Net Asset Value of $1, and generally speaking, they maintain this value. This forces fund managers to pay out any income the fund provides as interest to investors on a regular basis. In rare cases, money market funds can “break the buck” and fall below a $1 net asset value. For example, in 2008 a money market fund experienced losses due to the collapse of Lehman Brothers and fell to a NAV of $0.97. So even though money market funds are generally very stable, they are not completely without risk.

Money market funds are a great place to park money that you don’t need to have on hand immediately, but may need to use in the foreseeable future. However, investors should be cautioned not to hold an unnecessarily large amount in money market funds for long periods of time, because even with current yields hovering around 3.5% yields, they still provide a negative return once you account for taxes and inflation.

Though a safe place to hold money for a short period of time, they do not provide enough of a return to grow your portfolio and achieve a goal like funding retirement. But if you have some cash you don’t need immediately, you may want to consider a money market fund so at least it is earning something. If you aren’t sure if you can do that yourself, you may want to talk to a financial professional.

Paul R. Ruedi is a Certified Financial Planner™ professional with Ruedi Wealth Management in Champaign, Illinois.