You are contemplating putting part of your investment funds into a Money Market Mutual Fund (MMF). Recently

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Question:

You are contemplating putting part of your investment funds into a Money Market Mutual Fund (MMF). Recently MMFs have had trouble retaining funds. It was our understanding due to the nature of the investments of MMF that they were low-risk low return why would people not be putting their money into them?

· 1) First list and explain the type of instruments which an MMF typically invests its money.

· 2) Now talk about the reason within these two articles why you think that MMFs are losing investors’ funds.

New Money Market Fund Rules Affect Safety and Yields OCTOBER 14, 2016 BY Ken Tumin

New rules for money market funds that take effect today (October 14) will fundamentally change the way money market funds operate. The new rules are intended to prevent runs on money market funds like what was seen in the 2008 financial crisis. These rules only affect money market funds (MMFs) which are mutual funds available from brokerage firms. They don’t affect any deposit accounts including money market accounts which are essentially the same as savings accounts.

The most important change for individual retail investors is that prime and municipal money market funds may impose redemption fees or suspend redemptions during times of crisis. Prime funds mostly invest in short-term corporate debt while municipal funds invest in municipal debt.

Another change primarily affects only institutional investors. Prime and municipal money market funds that allow institutional investors will be required to maintain a floating net asset value (NAV). This means that you could lose money when you sell if the NAV has fallen from the time you had purchased the fund.

U.S. government and Treasury money market funds are exempt from these new rules. A simple way for investors to avoid these new rules is to move their money into government money market funds. However, this might not be necessary since several brokerage firms have made this change for their investors. In December 2015, Fidelity’s Cash Reserves fund, the world’s largest money market fund, transitioned its investment strategy to become a government fund. It’s now called the Fidelity Government Cash Reserves. Taxable money market fund assets decreased by $11.43 billion to $2.492 trillion, while tax-free assets decreased by $2.12 billion to $255.00 billion, according to the report, published by iMoneyNet.

Money Market Fund Yield Changes

These new rules have affected money market funds long before today. Yields on prime and municipal money market funds have risen considerably all year as investors have moved money out of these funds.

Every two weeks when I review the best savings, money market and checking account rates for the rate summary, I also review the yields of the popular Fidelity and Vanguard money market funds. These are listed at the bottom section of the summary under the title “Bank Account Alternatives”.

For many years since the Fed cut the Federal funds rate to near zero, these MMF yields have been at or close to 0.01%. After the Fed rate hike last December, these yields finally started to rise. Last January, the Vanguard Prime MMF yield had risen to 0.30% and the Fidelity MMF yield had risen to 0.13%. The yields of the municipal money market funds (Vanguard Tax-Exempt MMF and Fidelity Municipal MMF) remained at 0.01%.

While the Fed held steady, these MMF yields continued a slow rise this year. The lists below show how the yields have risen:

Vanguard Prime MMF Yields Vanguard Tax-Exempt MMF Yields Vanguard Federal MMF Yield

26-Jan-16 0.35% 22-Mar-16 0.02%

08-Mar-16 0.40% 05-Apr-16 0.22%

03-May-16 0.30%

20-Sep-16 0.55% 20-Sep-16 0.56%

14-Oct-16 0.60% 14-Oct-16 0.72% 14-Oct-16 0.30%

Fidelity MMF Yields Fidelity Municipal MMF Yields Fidelity Government Cash

9-Feb-16 0.20% 05-Apr-16 0.02% Reserves MMF Yield

12-Jul-16 0.33% 14-Jun-16 0.07%

09-Aug-16 0.12%

20-Sep-16 0.38% 20-Sep-16 0.23%

14-Oct-16 0.46% 14-Oct-16 0.42% 14-Oct-16 0.13%

You can see how the yields have changed for the prime and municipal funds as the time approached today’s date. It’s interesting to see how little effect last December’s Fed rate hike had on the municipal fund yields. It’s also interesting to see how high the municipal fund yields are now and how low the government fund yields are. It’s apparent that investors have moved their money out of prime and municipal money market funds and into government funds. According to this WSJ article: “Ahead of the new rules, cash has flowed briskly into money funds that invest in government securities. Assets under management at these government money funds increased to $2.11 trillion as of Wednesday, up 72% from $1.23 trillion on Jan. 6.”

That movement of money is having an effect on yields. This might not last. As mentioned in the WSJ article, this movement of money may be temporary as investors wait for things to settle down.

Savings Accounts or Money Market Funds?

The reason why I include money market funds in my weekly summaries is that I want to make sure readers are aware of conservative alternatives to bank accounts. These alternatives are not FDIC-insured, but they are still considered conservative. Savers will need to decide if higher yields justify the additional risk to principal and accessibility.

With the new money market fund rules, prime and municipal money market funds have more accessibility risk. These funds may now impose redemption fees or suspend redemptions during times of crisis. Is this risk significant? You’ll have to decide about that.

The yields on prime and municipal MMFs are now at levels where they are somewhat close to internet savings account yields. This is especially the case for municipal MMFs which can be exempt from federal income tax.

The safer government MMFs still have yields that are well below internet savings account yields.

MMF yields have risen this year, but internet savings accounts remain the best deal for both yield and safety. Of course, you can’t be complacent with your internet savings account. Make sure to monitor the rates to ensure your bank is keeping the savings account competitive. Please consider using our bank alerts system to notify you when your bank changes the rates on your accounts.

Should Investors Hold Their Cash in Internet Savings Accounts?

MMFs are still useful for investors to hold cash between investments. If you’re making multiple trades per month, transferring your cash between your savings account to your brokerage MMF account may be an issue. First, federal regulation limits electronic withdrawals from savings accounts to no more than six per statement period. Banks and credit unions will often allow an occasional withdrawal that exceeds the limit, but a fee will be charged. Second, transfers between banks and brokerages typically require ACH transfers which can take one to three business days.

The transfer delay issue is one reason why investors may want to keep their cash in MMFs instead of savings accounts. One way around this issue is to use a brokerage that’s connected to an internet bank. Capital One 360 is one example. They advertise instant transfers between online Capital One Investing and 360 banking accounts. That allows investors to keep their cash in the 360 Money Market Account earning a 1% yield (as of 10/14/16) until the day they want to buy some investment like a stock, bond or mutual fund.

This benefit isn’t available at all brokerages that are connected to internet banks. For example, Charles Schwab Bank has a High Yield Investor Savings Account, but its current yield is only 0.10%. Charles Schwab Bank used to have competitive yields on its checking and savings accounts, but that ended a long time ago. Investors who use Schwab Brokerage have little to no yield benefit by keeping their cash in these bank accounts.

https://www.depositaccounts.com/blog/2016/10/money-market-fund-rules-affect-safety-yields.html

The Pros And Cons Of Money Market Funds

By Glenn Curtis

Money market investing carries a low single-digit return, and when compared to stocks or corporate debt issues, the risk to principal is generally quite low. However, there are a number of positives and negatives that all investors should be aware of when it comes to the money market. In this article, we'll take a look at these ups and downs, and show you how the downs can greatly outweigh the ups. (To learn about money market basics, see Introduction To Money Market Mutual Funds.)

The Positives

1. A Great Place to Park Money

When the stock market is extremely volatile and investors aren't sure where to invest their money, the money market can be a terrific safe haven. Why? As stated above, money market accounts and funds are often considered to have less risk than their stock and bond counterparts. That is because these types of funds typically invest in low-risk vehicles such as certificates of deposit (CDs), Treasury bills (T-bills) and short-term commercial paper. In addition, the money market often generates a low single-digit return for investors, which in a down market can still be quite attractive. (To learn more about investing in market downturns, see Recession-Proof Your Portfolio.)

2. Liquidity Isn't Usually an Issue

Money market funds don't generally invest in securities that trade minuscule volumes or that tend to have little following. Rather, they generally trade in entities and/or securities that are in fairly high demand (such as T-bills). This means that they tend to be more liquid, and that investors can buy into them and sell them with comparative ease.

Contrast this to, say, shares of a mid-cap biotech company. In some cases, those shares may be highly liquid, but in most the audience is probably very limited. This means that getting into and out of such an investment could be difficult if the market were in a tailspin.

The Negatives

1. Purchasing Power Can Suffer

If an investor is generating a 3% return in their money market account, but inflation is humming along at 4%, the investor is essentially losing purchasing power each year. Over time, money market investing can actually make a person poorer in the sense that the dollars they earn may not keep pace with the rising cost of living.

2. Expenses Can Take a Toll

When investors are earning 2% or 3% in a money market account, even small annual fees can eat up a substantial chunk of the profit. This may make it even more difficult for money market investors to keep pace with inflation.

Depending on the account or fund, fees can vary in their negative impact on returns. If, for example, an individual maintains $5,000 in a money market account that yields 3% annually with his or her broker, and the individual is charged $30 in fees, the total return can be impacted quite dramatically.

•$5,000 x 3% = $150 total yield

•$150 - $30 in fees = $120 profit

The $30 in fees represents 20% of the total yield, a large deduction that considerably reduces the final profit. Note that the above amount also does not factor in any tax liabilities that may be generated if the transaction were to take place outside of a retirement account.

3. FDIC Insurance Net May Not Be There

Money funds purchased at a bank are typically insured by the Federal Deposit Insurance Corporation (FDIC) for up to $100,000 per depositor, according to Care One Credit Counseling. However, money market mutual funds are not usually government insured. This means that although money market mutual funds may still be considered a comparatively safe place to invest money, there is still an element of risk that all investors should be aware of. (To learn more, read Are My Investments Insured Against Loss?)

If an investor were to maintain a $20,000 money market account with a bank and the bank were to go belly up, the investor would likely be made whole again through this insurance coverage. Conversely, if a fund were to do the same thing, the investor may not be made whole again - at least not by the federal government.

4. Returns May Vary

While money market funds generally invest in government securities and other vehicles that are considered comparatively safe, they may also take some risks in order to obtain higher yields for their investors. So, in order to try to capture another tenth of a percentage point of return, it may invest in bonds or commercial paper that carries additional risk.

The point is that investing in the highest-yielding money market fund may not always be the smartest idea given the additional risk. Remember, the return a fund has posted in a previous year is not necessarily an indication of what it may generate in a future year.

It's also important to note that the alternative to the money market may not be desirable in some market situations either. For example, having dividends or proceeds from a stock sale sent directly to you (the investor) may not allow you to capture the same rate of return. In addition, reinvesting dividends in equities may only exacerbate return problems in a down market.

5. Opportunity Lost

Over time, common stocks have returned about 8-10% on average - counting recessionary periods. By investing in a money market mutual fund, which may often yield just 2% or 3%, the investor may be missing out on an opportunity for a better rate of return. This can have a tremendous impact on an individual's ability to build wealth.

The Bottom Line

Money market investing can be a very advantageous thing to do. However, before investing any money in a money market mutual fund, investors should first understand both the pros and the cons. Depending on your individual investment and where the market is heading, these accounts could make or break your retirement.

http://www.investopedia.com/articles/mutualfund/08/money-market.asp