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Fully-taxable money market funds, not to be confused with money market accounts, are securities that can be purchased through most brokerage accounts or directly from certain financial institutions. These funds can be thought of as mutual funds with holdings made up primarily of short-term debt obligations and cash-on-hand to ensure liquidity. Fully taxable money market funds are funds that produce interest that is fully taxable to US taxpayers, and therefore produce income that is treated akin to online savings and money market accounts and short term certificates of deposit.
Rates are not competitive with those in online savings and CD accounts in a low rate environment such as the current one, these accounts are more secure for investors investing over FDIC-insured limits. Short short-term rates rise, fully taxable money market funds would likely become more competitive with other liquid financial instruments.
Depositors in high tax brackets may find open-ended municipal money market funds to be a more attractive investment with higher tax-equivalent yields, as those interest earned in those funds is free of Federal tax, and state and local taxes to qualified residents.
| Fund Name |
7-Day Trailing Yield** (%)
|
WAM (days)
|
Assets ($mils)
|
Min Investment
|
| USAA MMF |
1.08% |
15 |
5855 |
$1,000 |
| Touchstone MMF/Class a |
0.86% |
53 |
109 |
$1,000 |
| Fidelity Select Money Market |
0.83% |
42 |
7134 |
$25,000 |
| American Century |
0.65% |
51 |
2624 |
$5,000 |
| Vanguard Prime / MMF Investor |
0.48% |
75 |
104404 |
$3,000 |
* Please note that this table only examines best current rates for fully taxable retail money funds. Institutional money funds - those requiring minimum deposits of $1 million to $10 million - may exceed the best rates of the best performing retail money market funds. Currently, rates in institutional funds are not significantly better than the best rates in retail funds.
** The 7-day trailing yield is a different metric from the equivalent Annual Percentage Yield (APY) metric (see the Financial Terminology section) upon which banks are allowed to market savings accounts and CD products. Since the 7-day trailing yield does not assume compounding of the interest paid over the seven days, the actual APY would, assuming rates were to stay constant, ordinarily be approximately 6 to 10 basis points (.06% to .10%) higher.
Money market funds are regulated under Rule 2a-7 of the Investment
Company Act of 1940. Moreover, fund managers are ordinarily bound by
fund rules to invest in short duration securities (usually less than
180 days) of specified credit rates in order to safeguard principal and
ensure shareholders' liquidity. On September 19, 2008, the US
Department of the Treasury enacted a rule whereby it will guarantee
that deposits in US-based 2a-7 money market funds as of that date will
not fall below par value as of that date (i.e., will not "break the
buck"). This rule
shall stay in place for at least one year from the date of
enactment. The rule does not protect capital added after that date, and does not appear to
guarantee interest accrued after that date. Nevertheless, the rule
should help to protect
the overall liquidity and stability of major money market funds.
Rates are generally quoted in terms of a seven-day trailing
performance, since there is no guarantee of future rates.
Please note that these funds differ significantly from closed-end bond
funds which may appreciate or decline in value according to the underlying value of the assets and the supply and demand for the fund. Fully-taxable money market funds are funds that keep ample cash on hand to pay redeeming depositors at face value, and invest new proceeds at the fund's net asset value.
Compare management fees, which are calculated and reported in terms
of expense ratios. Expense ratios tend to range between 0.10% and
0.50%. Over any length of time, those funds with the lowest management
fees tend to outperform those with higher fees.
Check the rules of the fund's prospectus carefully to see what rules
bind its managers. Be sure that the fund invests only in the highest
rated debt securities and that it maintains ample amounts of cash on
hand to pay shareholders who are selling their shares.
Those funds with lower weighted average maturities (WAM) which is
measured in terms of days will generally outperform in rising interest
rate environments, and underperform in declining interest rate
environments.
Certain funds require minimum balances, require that additional deposit
be of certain sizes and limit withdrawals. Try to avoid investing in
funds that limit your ability to buy and sell shares quickly.