If you think
Yields paid by the typically staid mutual funds, which invest mostly in short-term government bonds,
Some funds, such as
That compares with a 3% average payout for a high-yield online savings account. Although that's the highest in at least five years, banks haven't exactly
That's because the rates offered by banks are ultimately at their discretion and influenced by factors other than the Fed's moves. The biggest banks are still flush with pandemic cash, so they have barely budged from what they're paying depositors on their savings accounts. (The average for all banks was
Online banks are more eager for customer deposits so have been more responsive at passing on the Fed's rate increases to their customers. Still, given that money-market funds are investing mostly in Treasuries, their yields tend to move in lockstep with the Fed's rate. "Money funds always give the market what the Fed gives them," said Pete Crane, the founder of Crane Data.
Money-market funds are often used to safeguard cash that could be needed on short notice, such as for a home down payment or an emergency fund, or as a holding spot between portfolio investments. Given the funds' attractive yields, more investors should be giving them a second look.
Some already are. Money-market funds have been reeling in assets since April, hitting
Remember though, money-market funds aren't synonymous with bank accounts. They don't have
That's less of an issue now after regulatory reforms adopted as a result of the fallout of the 2008 financial crisis. In addition, most money-market funds just hold government bonds that are backed by the full faith and credit of the U.S. government. In the past, the funds that got into trouble invested in short-term corporate bonds.
Still, investors for whom safety is the No. 1 concern should stick with money-market funds that invest solely in government paper, not corporate bonds. The fund name will usually specify what it's investing in, but check the fund documents to be sure.
Of course, other cash-like investments are also offering high yields (relatively speaking) — looking at you short-term
It's a similar story with certificates of deposit — they offer potentially higher yields, but investors must commit to locking up their cash for a set period.
For those whose brokerage firms offer money-market funds alongside their accounts as a place in which to "sweep" excess cash, beware. Those funds rarely have the best yields, said Ken Tumin, the founder of DepositAccounts.com. If you have a large balance, you should consider switching to a different money-market fund that offers a bigger payout.
Keep an eye on fees, though. Unlike a bank account or a Treasury bill, money-market funds charge for managing your money. When yields were abysmally low, many money funds waived most of their fees, charging an average 0.08% instead of the typical 0.27%, Crane data shows. But with higher yields, fees are back to normal levels.
Finally, if you're in a high tax bracket, consider money-market funds that invest in municipal bonds, which provide interest that could be exempt from federal or state income taxes. Their yields aren't quite as high as other money-market funds right now, but Crane says it's only a matter of time before they bounce back. They tend to see big outflows at the end of the year and on April 15, so as prices fall, yields will head north.
