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One last warning: Bank money market
accounts are generally FDIC-insured, but management companies' funds
are not. These funds maintain a net asset value of $1 per share,
and in the last 30 years there has never been a fund that dropped
below that. This means there is little risk that you'll lose your
principal. But some people find even the possibility unnerving.
A good thing about money funds
is their convenience. If you need to pay a large, unexpected bill, you don't have
to frantically move money -- you just write a check on the money market fund.
Or if it is a bank money market account, you can move the dollars almost instantly
into your checking account. Beware of so-called sweep
money market funds offered by brokerage firms. Many brokerage companies treat
them as a profit center and pay very low interest rates while charging exorbitant
fees. The best of the rest
If you don't need access to your money immediately, but you need to feel confident
that you aren't putting it at serious risk and you also want to make a decent
return, consider these two options suggested by analyst Jeffrey A. Hirsch, president
of the Hirsch Organization and editor in chief of the "Stock Trader's Almanac
2006."
Ultrashort bond funds are administered by many investment
management companies. Bond funds offer a little more yield than money funds at
a slightly increased risk. Ultrashort bond mutual funds invest primarily in U.S.
Treasury notes, corporate bonds and mortgage-backed securities. Because these
bonds mature in no more than six months, the investments turn over quickly, and
bad luck generally doesn't hang around. Most major mutual fund companies offer
at least one of these. Exchange-traded funds, or ETFs, with
short-duration fixed-income holdings are a less attractive alternative. Only a
few fixed-income ETFs exist at this point in time, and most focus on Treasury
securities. They are available through iShare funds sold by Barclays Global Investors,
which also offers two bond ETFs with broader holdings. One mimics the Lehman Brothers
Aggregate Bond Index, the other a Goldman Sachs long-term corporate bond index.
These are complicated and sold through brokers (which involves paying commissions).
But their low cost and tax efficiency make them worth considering. They are only
slightly riskier than U.S. Treasury bonds and potentially more lucrative. Compare
highest-yielding CDs, money market accounts.
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