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Find the fees before funding a money market

The stock market roller coaster has been a bit too much for many investors, so they're jumping off into stomach-settling money market funds.

High yields -- often reaching upwards of 6.5 percent -- are attracting investors, but a marketing tactic that in the end zaps consumers with a lower yield is fooling some people.

"Whenever you're looking at a money market fund or even a lot of bond funds, there isn't a lot a manager can do to raise the yield," says Maria Scott of Chicago-based American Association of Individual Investors. "They can invest in riskier securities or lower expenses. When you see one has a much higher yield than another that can't be explained by the types of securities, check out the expense ratio."

Money market funds are mutual funds that generally invest in short-term, highly rated government and corporate securities. The FDIC doesn't back them, but they're considered very safe and, for the most part, they're no-load, meaning, there's no sales commission.

No free lunches
But, like all funds, there is an expense ratio. It helps pay for the cost of running the fund.

Most money market fund expense ratios are in the range of 0.15 percent to 0.50 percent -- but they can run higher. An expense ratio of 0.25 percent means a $25 annual fee for a $10,000 investment.

Any money you pay for fees and other expenses will eat away at the yield on your investment. You can find the expense ratio in the expense table in the front of the fund prospectus.

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Most money funds waive at least a portion of their fees -- for a while. Money market funds are very competitive and they all want to get that No. 1 ranking for the highest yield.

There is no standard amount of time that fees are waived. If the management fees are to be imposed after 90 days, for example, that will be stated in the prospectus. But if the fee is waived indefinitely, it can be reinstated at any time without notice. The prospectus will give this information, but too many investors look at the expected yield and make an investment decision without reading the fine print. When the customer figures out why the yield is dropping, it's too late

Inspect the prospectus
Michelle Smith, managing director of the Mutual Fund Education Alliance, a trade group in Kansas City, Mo., says investors rarely take the time to read the prospectus before investing. Nevertheless, Smith says, waiving the expense ratio temporarily isn't meant to be misleading; it's simply an effort to make the fund more attractive.

"Anything that lowers the fees even temporarily is a good thing. If it's 30 days, investors have to be sure they understand that's 30 days I'm not paying the management fee."

While yield is key to any investment, Smith points out, there are more things to consider when buying a money market fund.

"Look at what works for you. Is it government backed? Some money markets have higher risk but they're relatively safe. U.S. Treasury funds, for example, are going to offer a high degree of safety. Cost is always important, but go to step B; check past performance and other factors. All money markets aren't alike."

You'll also want to make sure a check-writing option is available if that's important to you. Many funds have restrictions on the number of checks you can write and the minimum amount of the check.

Contrary to common beliefs, a lot of investors are keeping cash in money market funds for the long term -- it's not just waiting to be reinvested.

"Money markets have become more competitive than traditional vehicles -- CDs for example," according to Smith. "A lot of people invest in money markets now with the idea of leaving the money there."

And always remember to read the prospectus. If the expense table page doesn't answer your questions, call the fund and find out exactly when fees are imposed and how much they'll be.

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