For years, money market mutual funds have paid practically nothing. But each time the Federal Reserve lifts short-term interest rates, yields on money market funds tend to rise in tandem. “That’s one of their most attractive qualities,” says Peter Crane, president of Crane Data, a money fund research company. Many money funds yield more than 1%, and Crane expects yields on some funds to surpass 2% this summer. Rates on savings accounts from banks have also been increasing but have not kept pace with Fed rate hikes.
Money market funds invest in high-quality, short-term securities, such as Treasury bills, commercial paper and certificates of deposit. Although they carry little risk, they are not protected from losses by the Federal Deposit Insurance Corp. Cash that must be in a safe place, such as an emergency fund, is best stashed in an FDIC-insured bank account. Money funds provide a convenient holding place for cash in, say, a linked brokerage account.
You are more likely to get a higher payout if you invest in a money fund with low expenses. Vanguard Prime Money Market Investor (VMMXX) yielding 1.6%, has an expense ratio of 0.16%. Taxable money funds generally offer higher yields than tax-free municipal money funds. But if you’re in one of the top federal income tax brackets and live in a state with high income taxes, you may come out ahead with a tax-free fund. Look at the taxable-equivalent yield - the yield you’d need to earn on a comparable taxable fund after paying taxes to match the yield of the tax-free fund. For example, Vanguard Municipal Money Market (VMSXX) yields 1.10%, which is a taxable-equivalent yield of 1.75% for an investor in the 37% federal tax bracket.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
-
Amazon Now Delivers Fresh Groceries in 1,000 Cities: What You Need to KnowAmazon's expanded grocery delivery service costs less than Amazon Fresh. Is it a better deal?
-
Stocks Struggle Ahead of Busy Fed Week: Stock Market TodayThe minutes from the July Fed meeting will be released Wednesday, while Chair Powell will deliver a key speech at Jackson Hole on Friday.
-
Trump-Era Regulations Will Broaden Access to CryptoThe Kiplinger Letter The president wants to make the U.S. the leader in digital assets.
-
July CPI Report Boosts Rate-Cut Odds: What the Experts SayThe July CPI report shows that tariffs are having a slight impact on inflation, though not enough to keep the Fed from cutting interest rates.
-
How Big Will the Fed Rate Cut Be This Fall?A dismal July jobs report has lifted expectations for fall rate cuts. How low could the fed funds rate be by year's end?
-
July Jobs Report Renews Rate-Cut Hopes: What the Experts Are SayingThe July jobs report shows weakening in the labor market and lifts expectations for a September rate cut.
-
Should You Buy These ETFs Before the Fed Cuts Rates?The Fed is likely to lower interest rates this fall, and tactical investors might want to look closer at these ETFs before rate cuts resume.
-
July Fed Meeting: Updates and CommentaryThe July Fed meeting came and went, with Fed Chair Powell saying little about a September rate cut and President Trump.
-
What Will the Fed Do at Its Next Meeting?Rate cuts remain on hold this summer, experts say.
-
Amazon Resale: Where Amazon Prime Returns Become Your Online BargainsFeature Amazon Resale products may have some imperfections, but that often leads to wildly discounted prices.
