Government Money Market Mutual Funds May Be a Better Alternative To Cash

Ted

FYI: It’s generally suggested that most portfolios have at least a small allocation to cash. Not only does it help manage overall portfolio risk, it provides a cash cushion that allows investors to take advantage of dips in the market.

With equity valuations stretched, investors should look for ways to protect their capital while still earning a competitive rate of return. In this article, we’ll examine how government money market mutual funds (GMMMFs) may be able to fill that need.

Regards,
Ted
http://mutualfunds.com/money-market-funds/government-money-market-mutual-funds-an-alternative-to-cash/

msf

Okay, so these MMFs have higher risk than bank accounts (" they don’t come with the guarantees that are offered by bank products"), and they offer lower rates than bank accounts (the highest yield mentioned is VMFXX at 0.92%, well less than the 1%+ one can get at banks).

Nor is it mentioned mentioned is that all MMFs, including government funds, can take seven days to honor a redemption the same as for bank savings accounts (Regulation D). Thus they're technically not quite as liquid as checking ("demand deposit") accounts (or the "cash' in the subject line).

So what's the point that the article is trying to make?

The article also conflates Treasury MMFs with government MMFs. Some government MMFs do hold only "Treasury securities [] backed by the full faith and credit of the U.S. government" as the article states. But others, like VMFXX, can hold other paper including government obligations and repurchase agreements.

As the Vanguard prospectus for this fund notes: "Repurchase agreements carry several risks. For instance, if the seller is unable to repurchase the securities as promised, a Fund may experience a loss when trying to sell the securities to another buyer." Not quite as safe as a Treasury fund or cash.

Nearly any product, including government MMFs, has good uses. It's just that this article gets many of the attributes wrong. IMHO the main virtue of gov MMFs is that brokers allow you to use them for your trading ("core", "transaction") account. Convenient, and for those worried about every last ounce of risk, safer than prime MMFs. (Or so the theory goes - there's the looming debt ceiling risk.)

fundly

Agree completely with msf. Currently getting 1.20% on cash at Synchrony bank. Even better I recently bought at Ally bank ,no penalty 11 month cd's paying 1.50% (25k minimum. Lower % for less). Transfer to brokerage takes 3 days by ACH. Both are insured, so no possibility of loss. This is a much better way to hold cash.