Banks, brokerages and mutual fund companies offer
money market mutual funds (MMF). They're most commonly used by people
with brokerage accounts who sell a stock and then put the proceeds
in a MMF until they decide where to reinvest the cash. But these funds
can be used to build cash for an emergency fund or other short-term
At a glance
Money market funds are not FDIC insured, even if you open
an account at a bank, but if you're willing to take just the slightest
bit of risk with your liquid savings, check them out because they
pay a better rate than a basic bank money market account (MMA.)
The reason it's OK to take on the risk is because
MMFs are highly regulated and invest in very safe, short-term debt
securities such as certificates of deposits and U.S. Treasury bills.
The funds try to maintain a share price of $1. There's no guarantee
a fund will be able to maintain the share price, but no consumer
has ever lost money in one of these funds.
||Money market funds
High yield MMAs
Since someone is paid to oversee the fund and manage the
investments in it, you'll pay a fee called the expense ratio, which
helps pay the cost of running the fund. The advertised yield has
already had the expense ratio deducted. Fees reduce the yield so
it's always important to look for a fund with a low expense ratio.
Vanguard has a reputation for having some of the lowest fees around.
If they're charging an expense ratio of .30 percent, it's fair to
assume that the industry average is perhaps .50 percent. You'd want
to avoid funds charging much above that. You can find the expense
ratio information in the prospectus and on many brokerage or stock
Money market funds are divided into two categories,
taxable and tax-free. Taxable funds usually pay a higher yield,
but that doesn't always make them a better deal. If you're weighing
a taxable fund against a tax-free fund, you'll need to do some math
called the tax-equivalent yield formula
to see which will give you the better return.
Money market funds allow you to write checks and make
electronic transfers, but most accounts establish a minimum dollar
amount. Electronic, telephone and pre-authorized transactions are
limited by federal regulations to six per month, with no more than
three being by check, draft or debit card. Check with your institution
to see if it imposes a fee after a certain number of withdrawals
if your account balance drops below a certain level.