If you’re looking for a safe, short-term investment for your cash, money market mutual funds could be the perfect choice.
You’ve probably read about FDIC-insured money market accounts, which you can open at a bank or credit union. Money market mutual funds are a different animal. They’re market investments, not bank accounts—and it’s important to understand that they are not FDIC insured.
Nevertheless, money market mutual funds more than hold their own as a safe place to earn a return on your cash for short-term investing.
The Best Money Market Funds
The best money market funds offer a combination of positive yield, low risk and a low expense ratio. To make our selection, we combed through the list of money market mutual funds at MutualFunds.com and identified those with the highest yields, lowest expenses and a minimum investment balance of $1,000,000 or lower. Here are the 11 funds that topped our selection, sorted by their seven-day yield:
Note that the seven-day yield is an industry standard for side-by-side comparisons of money market funds. It takes into account fund distributions plus appreciation, minus average fees over a seven-day period, and assumes that this average continues over an entire year.
When you are selecting a money market fund, make sure you can meet the minimum investment balance. In addition, it’s important to understand the investments held by each fund. Carefully research your options before making a decision.
And keep in mind that when it comes to investing, past performance is no guarantee of future results.
Money Market Funds with Low Costs and High Returns
We noticed a few patterns when comparing the best money market mutual funds on our list.
First, when it comes to expense ratios, many of the funds with the highest fees also require very significant minimum deposits. The one exception: Fidelity Money Market Fund (SPRXX), which is the only one on this listing with no minimum deposit requirement.
The reality of the current low-rate environment is that money market fund yields are minimal. When it comes to the funds on our list, few offer a seven-day yield that much above zero—all but one yield less than 0.10%.
There’s just one money market fund that stands out in terms of cost, yield and minimum investment: Invesco Premier Portfolio Fund (IMRXX). If you can meet the $1,000 minimum investment size, IMRXX offers a combination of relatively high returns with low expenses.
What Is a Money Market Mutual Fund?
A money market mutual fund—often referred to as a money market fund—is a low-risk investment vehicle that provides both a modest return on your money and a high degree of liquidity. That means you can easily and quickly move cash in and out of a money market fund without fees or penalties.
Money market mutual funds were first developed in the 1970s before bank money market accounts came on the scene, as an alternative to low-yielding savings accounts. As its name suggests, a money market fund is a type of mutual fund, which invests its shareholders’ money in short-term, high-quality debt. This makes a money market fund much less risky than mutual funds that buy stocks or even longer-term bonds.
Money market funds can be categorized into three groups: prime, government and tax-free.
- Prime money market funds are typically invested in short-term corporate and bank debt securities.
- Government money market funds invest at least 99.5% of their funds in government-backed securities, making them extremely safe investments.
- Tax-free money market funds are invested primarily in municipal bonds or debt issued by other entities whose interest payments are exempt from federal income taxes.
Why Are Money Market Funds a Good Option?
Money market funds can be a highly useful tool for holding the cash component of your investment portfolio. The key advantage of money market funds is the fact that they are highly liquid investments.
Take a real estate investment property, for example. Real estate may offer rich returns over the long term, but it’s a highly illiquid investment as it would require at least a couple of months to sell a property and get cash. A savings account, on the other hand, is highly liquid—you can just go to an ATM to get cash.
Money market funds offer higher liquidity than certificates of deposit (CDs) and Treasury bills while also offering ultra-low risk. Unlike CDs, which you generally need to hold to maturity to cash out without penalty, money market funds don’t have maturities and can be liquidated on demand. You can sell Treasury bills on the secondary market with ease, but it’s also possible to take a loss on the sale.
Money Market Fund vs Savings Account
If this sounds similar to a high-yield savings account or a money market account, it is. The biggest difference is that yields on money market mutual funds respond much more rapidly to changes in market interest rates. As interest rates rise, the APYs on most money market accounts and savings accounts lag the market significantly while money market fund yields respond immediately.
This can make money market funds a great choice for earning a return on your cash. That’s particularly true when you know you have an upcoming big-ticket purchase and you need quick access to cash.
Let’s say you’ve saved up a down payment for your first home, for example, and you’re searching for the perfect property. Putting that money into stock investments would be too risky since you want to buy the house soon and market volatility could eat up some of your investment. But the balance is large enough that you don’t want to miss out on earning interest by holding it in your checking account. In that case, a money market fund would offer you the liquidity and stability you want with the potential for a modest return.
Money Market Funds in a Low-Rate Environment
As the Covid-19 pandemic stretches on, interest rates and yields have continued to fall. Rates on everything from CDs to money market funds have fallen to nearly zero. Today, some money market funds earn a yield of 0.00% while the highest paying funds yield little more than about 0.10%. Low yields have presented challenges to investors looking to earn income from cash.
For those who have cash balances below FDIC insurance limits, online savings accounts and money market accounts pay the highest rates. For those with cash balances well above FDIC limits, a money market fund is a relatively safe option. While yields are at historic lows, money market funds should react quickly when they begin to rise again.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
