Why are Money Market Mutual fund yields sometimes so low?
Money market mutual funds invest in a diverse portfolio of high-quality, short-term, interest-bearing securities. The income generated from these securities, minus fund fees, is then distributed to the fund’s shareholders. Consequently, when the returns on the securities held by money market mutual funds are minimal, the yields passed on to investors also reflect these low rates. The Federal Reserve’s (Fed) interest rate policy plays a crucial role in determining money market rates, significantly influencing these yields.
How “short-term” are the investments in money market mutual funds?
Regulations stipulate that money market mutual funds can only invest in securities maturing within 397 days. A minimum of 50% of a fund’s total assets must be held as Weekly Liquid Assets. These assets can include cash, direct U.S. government obligations like Treasury bills, specific U.S. government agency debt issued at a discount maturing in 60 days or less, or securities maturing or payable within 5 business days. For taxable money market mutual funds, at least 25% of total assets must be in Daily Liquid Assets, which can be cash, direct U.S. government obligations, or securities maturing or payable within one business day. The remaining investments can have longer terms, provided the fund’s overall weighted average maturity remains at 60 days or less. These rules ensure money market mutual funds maintain a high degree of liquidity and safety.
Is there government insurance for money market mutual funds?
The U.S. government does not provide insurance for any type of mutual fund, including money market mutual funds. Like stock and bond mutual funds, money market mutual funds are considered investments and are not guaranteed by the government. It’s crucial for investors to recognize that money market mutual funds carry investment risk and are not insured, unlike bank deposits which may have FDIC insurance. Understanding this distinction is vital for making informed investment decisions.
