Money Market Mutual Funds

MONEY MARKET funds that are sold by mutual fund companies and brokerage firms have been a big bonanza for small savers. Although the yields from these funds have declined from their stratospheric levels of 2002 and 2003, they were higher than the inflation rate in 2006. And in the first half of 2006, they showed a sharp increase because of an upturn in the interest rate of short term Treasury notes.

The chief measure of a money fund's safety is the quality of investments that its managers make with your money. In effect, the funds make short term loans to federal, state and local governments as well as to corporations and banks. Generally, the higher the risks that a fund takes, the higher the yields that it pays.

Some safety first investors have flocked to money market funds that buy only government securities, such as Capital Preservation Fund and Cardinal Government Securities Trust. These often pay a point or so less than do ordinary money funds. Almost invariably, you can feel quite secure investing in a regular money fund, particularly if it is run by a well established mutual fund group or brokerage firm. But to sleep more soundly at night, check that the average maturity of the fund's securities is 60 days or less by asking the fund or looking at IBC Donoghue's Money Fund Tables, published in over 70 newspapers. Longer maturities do not give fund managers enough flexibility. If interest rates rise and the fund is locked into securities that pay lower rates, disgruntled shareholders might start a drastic withdrawal of their funds.

Choosing a money market fund only because of its high yield can be a mistake. Since most ordinary money funds make the same kind of investments, their returns are usually within one percentage point of each other. You might be wiser to seek out money funds that let you shift your assets into other kinds of mutual funds when you think interest rates are heading down and the stock market is heading up. Some money funds have such exchange agreements with independent mutual funds. Other money funds belong to one of the many fund families. These families also have funds that invest in stocks, and sometimes in corporate, government and tax exempt bonds.

Once you invest in a family, you usually can shift your cash from, say, a money fund into a stock mutual fund merely by making a phone call. Often the transfer costs nothing, and generally you can move your money around as frequently as you like. But a few fund families limit the switches in various ways to protect the fund against a sudden loss of assets in any one fund.

A number of companies have good reputations for performance and offer a variety of funds. A sampling of the families that meet those criteria would include Fidelity, Kemper, Putnam, T. Rowe Price, Stein Roe & Farnham, Vanguard and many more.

Your own selection of' a mutual fund family should be based chiefly on how well its stock funds have performed over the past decade. The time may come when you will want to transfer some assets from your money market fund to your stock mutual fund. If you have chosen your fund group carefully, you will be able to keep it all in the family.