Investors in search of relative safety and attractive yields are piling into money market funds at record levels. Retail money market fund assets hit a record high of $1.86 trillion as of the week ended March 22 , according to the Investment Company Institute. In particular, they fled to government money market funds – which hold U.S. Treasurys – with retail assets surpassing $1.25 trillion. The funds are a port in the storm for investors who are jittery over the recent regional banking crisis, according to Goldman Sachs. “This inflow into government money market funds indicates a continuation of flight to quality by institutions and retail investors following the [Silicon Valley Bank] banking crisis,” wrote analyst Steven Alexopoulos. In all, it’s not a bad place to hide. The Crane 100 Money Fund Index is posting an annualized seven-day current yield of 4.54% as of March 27. Consider it a positive outcome of the Federal Reserve’s latest move to boost interest rates by a quarter percentage point. Treasurys are another beneficiary of higher rates, with yields on the six-month T-bill exceeding 4.8% and the 2-year note topping 4% on Tuesday. Investors shopping for a money market fund would do well to look beyond the most promising yields. Here’s what you should know as you browse: Three varieties In addition to government money market funds, there are also tax-exempt money market funds. These offerings hold municipal market securities and have the added benefit of providing income that’s exempt from federal income taxes. Many investors tend to keep their cash in a taxable brokerage account. With yields rising, it’s time to think about the tax hit from those money market funds. That’s where tax-exempt or municipal money market funds enter the picture. “When yields were really low, it was hard to get excited about the implications of paying taxes on a 0.02% yield, but now these yields are meaningfully higher,” said Christine Benz, director of personal finance at Morningstar. She noted that there are also some state-specific money market funds, which might make sense for residents in high-tax jurisdictions. Finally, prime money market funds typically invest in short-term corporate paper, which can carry some credit risk, said Amy Arnott, portfolio strategist at Morningstar Research Services. “I think that for most investors, they’re better off sticking with a government money market fund or a broader money market fund that invests in short-term corporates as well as government securities,” she said. Fees matter. You’ll want to compare prices as you shop for a money market fund. “The nice thing about a low expense ratio is that it keeps the fund manager from reaching for higher-risk securities in order to deliver a competitive yield,” Benz said. Risks Money market funds offer relative safety, but they do have some risk. For starters, the Reserve Primary Fund fell below its $1 net asset value during the great financial crisis in 2008. Some of its underlying holdings included commercial paper that was issued by Lehman Brothers. The fund faced redemption issues as investors flocked to the exits at the same time. “Before things went south, the fund attracted lots of inflows because it had the highest 12-month yield, compared to any other money market fund,” Arnott said. “It’s usually not a good idea to go out and buy the money market fund with the highest yield.” Money market funds also shouldn’t be confused with money market accounts – which are interest-bearing accounts you can open at a bank. Money market accounts are covered by the Federal Deposit Insurance Corp, which backs the accounts by up to $250,000. Money market funds aren’t federally insured. Finally, while hot yields are calling prospective investors toward money market funds, they ultimately won’t keep up with inflation. “These funds can be a good place for short-term savings or assets you need to use in about a year,” said Arnott. “But if you’re looking to build long-term wealth, they’re not necessarily a great place to be.” – CNBC’s Michael Bloom contributed to this report.
