savings

4 questions for money market fund shoppers

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Highlights
  • High fees can quickly gobble up paltry money market yields.
  • Money market funds carry expense ratios, or the fees paid to the fund company.
  • Some fund companies charge a $20 annual account service fee.

As stock markets get pummeled, investors are fleeing to safety. So money markets are finally seeing higher cash inflows.

But money markets aren't a slam-dunk investment, either. High fees can quickly gobble up paltry yields as Treasuries hover near historic lows. Bank money market account yields averaged 0.55 percent in early October, according to Bankrate.com. And yields are expected to stay at rock bottom after the Federal Reserve pledged to keep benchmark interest rates near zero percent until mid-2013.

That means even slight drags on money market fund yields can translate into a negative yield, and that doesn't take into account the fees attached to money market funds.

Yes, all money markets are invested in short-term securities, such as commercial paper, certificates of deposit and Treasuries, that mature in less than 13 months. But many bank money market accounts don't charge fees like the money market funds offered by mutual fund companies do.

A money market account, or MMA, is a high-yield savings account. It also is a bank product and as such is insured up to the $250,000 limit set by the Federal Deposit Insurance Corp. for those deposits.

Money market funds, or MMFs, are mutual funds you can purchase through a bank, brokerage or a fund family such as Vanguard or Fidelity. Most retail MMFs are linked to brokerage accounts, giving investors a place to park their cash after the sale of stock. But these investments also can be used to build cash for savings purposes.

Money market mutual funds issue redeemable shares by maintaining a net asset value of $1 per share to investors. And they usually carry expense ratios, or the fees paid to the fund company to manage a particular money market fund.

The expense ratio, or management expense ratio, includes investment advisory fees, administrative costs, other operating expenses and the 12b-1 fee charged as a distribution expense. The expense ratio will be in the fund's prospectus, expressed as a percentage of the total fund assets.

To bulk up scrawny yields, Charles Schwab & Co. and The Vanguard Group are waiving their money market fund expense ratios right now.

"But even after the expense ratio waivers, you're not making much," says Rimmy Malhotra, chief investment officer at the investment information website GoalMine.com.

Given this money-draining scenario, investors should consider why they're parking money in these money market funds, Malhotra says. Bank money market accounts are better bets because they're everywhere and many have no fees, he says. They also are protected against loss by the FDIC.

Robert Laura, president of Synergos Financial Group in Howell, Mich., agrees with Malhotra. Money market funds are best when you're waiting to invest the money, he says.

Here are some questions to answer when shopping for a money market fund.

What expense ratio are you paying? Compare total expense ratios across money market funds, Malhotra says. The totaled figure usually includes management fees and fund expenses. They're found in the prospectus.

"Fund companies are required to show you returns in dollar terms," he says.

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