[ad_1]
The Federal Reserve raised interest rates to 22-year highs in July. That’s generally bad news for borrowers looking to pay down debt — but it could be good news for income-seeking investors, especially those who are considering investing in money market mutual funds.
Money market mutual funds are investment vehicles that invest in high-quality, short-term debt securities, and pass the interest payments on to investors. Like other mutual funds, money market mutual funds only change price once each trading day.
Some money market mutual funds now pay substantial yields — and while they’re not risk-free, they’re typically considered lower-risk than most other types of mutual funds. It’s just a matter of finding the right one for your portfolio.
5 best money market mutual funds by yield
Below is a list of the five highest-yielding money market mutual funds that have at least $1 billion in assets.
American Century U.S. Government Money Market Fund |
||
Federated Hermes Municipal Obligations Fund |
||
Federated Hermes Tax-Free Obligations Fund |
||
Vanguard Municipal Money Market Fund |
||
Western Asset Select Tax-Free Reserves |
Source: MutualFunds.com. Data is current as of Aug. 23, 2023 and is for informational purposes only.
You may be wondering why some of the funds above are called “government” money market funds, while others are specified as “municipal” money market funds. These refer to separate types of money market funds — and it’s important to understand the differences between them.
Advertisement
NerdWallet rating
5.0 /5 |
NerdWallet rating
4.7 /5 |
NerdWallet rating
5.0 /5 |
Fees $0 per trade for online U.S. stocks and ETFs |
Fees $0 per trade. Other fees apply. |
|
Promotion Get $100 when you open a new, eligible Fidelity account with $50 or more. Use code FIDELITY100. Limited time offer. Terms apply. |
Promotion None no promotion available at this time |
Promotion None no promotion available at this time |
Read review |
Read review |
Types of money market funds
The three types of money market funds are government money market funds, municipal money market funds and prime money market funds. Each type has a slightly different investment profile and tax treatment.
Government money market funds
Government money market funds invest at least 99.5% of their money into highly liquid, government-backed assets such as cash, short-term U.S. government debt and repurchase agreements backed by government debt.
Some of the assets in government money market funds, such as Treasury bills, generate income that is usually exempt from state and local taxes. However, some of the other assets, such as repurchase agreements, are subject to those taxes — so it’s a good idea to assume that government money market fund income is subject to those taxes as well.
There is, however, another type of money market fund whose income can be exempt from both federal and state taxes, under the right circumstances. That’s the municipal money market fund.
Municipal money market funds
Municipal money market mutual funds — also known as tax-free money market mutual funds — invest in short-term municipal debt.
The income generated by these funds — like the income generated by municipal bonds themselves — is exempt from federal income taxes. Most states also exempt their own municipal bonds from state income taxes.
So depending on where you live, you may be able to find a municipal money market fund whose income is exempt from both federal and state taxes. Look for a fund that invests specifically in municipal debt from your state of residence.
Prime money market funds
Prime money market mutual funds invest in short-term corporate debt, rather than government debt.
The income generated by prime money market funds — like the income generated by corporate bonds — is fully taxable, unless it is held in a tax-advantaged account.
Money market mutual funds vs. money market accounts
The table below can help clarify them.
Money market mutual funds |
||
---|---|---|
Yes, up to $250,000 per person per account. |
||
Limited. The fund can be bought and sold, and income can be cashed out or reinvested. Some funds may have check-writing privileges. |
Often has similar features to a checking account: ATM withdrawals, check-writing privileges, direct deposit, etc. |
|
May be exempt from some or all income taxes, depending on fund type and location. |
How to choose a money market fund
See what’s available in your brokerage account
Not every money market mutual fund is available in every brokerage account. Some brokers that are also mutual fund custodians — Fidelity, for example — only offer access to their own money market funds.
Decide which type of money market fund is right for you
The type of investment account you’re using may also be relevant to your choice of money market mutual fund.
An in-state municipal money market mutual fund can provide you with completely-tax-free income — a valuable benefit if you’re investing through a taxable brokerage account.
But if you’re investing through a tax-advantaged account such as an IRA or health savings account (HSA), then you don’t need to worry about taxes in the first place, and you may want to pick the highest-yielding fund available instead.
Check yields, fees and expense ratios
Yield isn’t the only number you should look at when you’re shopping for a money market mutual fund.
Mutual funds also have expense ratios, or annual percentage fees. Many also have one-time buying or selling fees. When evaluating funds, it’s good to subtract expense ratios from yields — and also consider other fees — to determine which fund is the best-paying.
Neither the author nor editor held positions in the aforementioned investments at the time of publication.
[ad_2]
Source link