MONEY MARKET Q & AS
Q: I've received approximately $50,000 from the sale of my house and don't anticipate buying a house for another year. Can you please identify some safe funds with a good return. -Roland
A: Bet you'd love this answer to be one that includes the names of a few hot tech funds that promise '99 like total returns so that that 50 Grand could turn into a 100 or more within in a year. But, sorry, if you'd like to have at least $50,000 in a year to buy another home, the safest kinds of mutual funds to invest in would be money market mutual funds.
One thing extended bull markets, like the one we've just passed through, have a tendency to do is to give people a sense that big time money is found on fast growing trees. The reality is, however, equity funds are long-term investments. Long term meaning investors ought not to want out of that investment for at least three- to five or more years. And, with the average stock fund's year-to-date total return at 0.12 percent, as of May 4, when at the end of the first quarter the average equity fund's total return was over 7 percent, according to Lipper, Inc., you can see why those time frames can make sense.
Money market mutual funds don't invest their assets into equities but rather debt investments all of which are either taxable or tax-free securities. The type that's best for you depends upon which tax bracket you're in. Those in the medium and lower tax brackets will typically have more after-tax return in their pockets when investing in taxable money market funds. Those in the higher tax brackets get more bang for their bucks via tax-free money market funds.
....Again, investing in the stock market when the investment time horizon is only 1-year and expecting to find a "safe" fund is like pouring a five-pound bag of cement into a one gallon container---it's not a fit.
Q: Can you please explain the difference (if any) between a regular mutual fund and a money market mutual fund? Also, what is the difference between a tax-exempt money market mutual fund and a taxable one. -From G4
A: In a nutshell, the difference between a mutual fund and a money market fund is time and net asset value. As noted above, securities held in money market mutual funds must all be short-maturing ones. And, the net asset values on the fund isn't supposed to fluctuate; it's $1 per share when purchasing shares and $1 per share when liquidating them. The return you get is a yield and considered as income.
All long-term mutual funds, including all types of stock and bond funds, have net asset values that fluctuate depending upon the value of the securities held in their respective portfolios. There's no time restrictions on portfolio holdings in them as there are on money market funds and net asset values will go up and down depending upon market conditions and what's in the fund's portfolio.
Money market mutual funds make a wonderful entry into the mutual fund arena and have a place in most everyone's portfolio as they don't ask investors to take much risk with their money. All other types of mutual funds do.
The difference between taxable money market funds and tax-fee ones is simply a matter of what's in the portfolio. Taxable money market funds invest in fixed-income securities that are taxable, like any variety of Treasury securities, or commercial paper, i.e., short term corporate loans, even Eurodollar CDs and repurchase agreements.
Tax-free money market mutual funds invest their assets into municipal bonds. Municipal bonds are the debt securities of state or local governments all of which are either classified as public purpose bonds and income from them is 100 percent tax-free, or, private purpose bonds, Income from them may or may not be 100 percent tax free.
Because income on tax-free money market funds is not taxed, yields on these types of funds is lower than the yields on taxable money market funds. Currently, taxable money market funds have been yielding over 5 percent while tax-free yields are over 3 percent.
To read more articles, please visit the column archive.