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.
Investment Rationale for Government Money Market Funds
Whereas traditional taxable money market funds invest in short-term CDs, commercial paper and other low-risk, highly liquid securities, government money market funds focus solely on government securities and repurchase agreements collateralized by such. While they typically don’t pay the highest yields, they do offer some of the safest investments available.
In case if you are wondering whether money market mutual funds are right for you at all, you should read this article.
The primary advantages of these funds outside of safety are that they offer daily liquidity and are free from liquidity fees imposed by the SEC. Since they invest in very short-term Treasury bills and repos, they provide easy tradability on a daily basis and you can quickly take advantage of rising rate environments. With the income from federally issued Treasury securities being state tax deductible, investors seeking to lower their tax bills may also favor government money funds.
A Few Key Risks to Consider
Government money market funds are designed to be ultra-safe, but they don’t come with the guarantees that are offered by bank products. CDs, checking and savings accounts are FDIC-insured up to $250,000, but government money market funds come with no such protection. The chance of losing money investing in a government money fund is very remote, but theoretically possible.
Government money funds also typically deliver below-average yields. As risk declines, so does return potential, and investors could be sacrificing higher yields that could be achieved elsewhere.
Check out here what the money market reforms introduced in October 2016 mean for investors.
Who Might Want to Consider Government Money Market Funds
Anybody looking for a place to park their cash could do well to consider a government money market fund. Investors managing their cash positions likely need a high degree of liquidity and quick access to their funds, and government funds provide both. Individuals with lower risk appetites may want to look at these funds since all Treasury securities are backed by the full faith and credit of the U.S. government, which has never defaulted on its debt payments.
Learn more about floating NAV for money market funds here.
Those seeking to establish a “rainy day” fund could also find government money funds appealing thanks to their safety and liquidity. Many offer check-writing capabilities for even quicker access to the money.
Funds to Consider
If you think that a government money market fund might be a fit for you, here are a few options to consider.
Since government money funds have a high degree of safety, investors can feel more comfortable targeting higher yields. Each of the funds listed above offers an above-average yield with both liquidity and flexibility. The Fidelity Government Money Market Fund (SPAXX) is the biggest fund of its kind in the marketplace. The American Funds U.S. Government Money Market Fund (AFAXX) offers an opportunity for investors with more limited resources, as the fund requires a low minimum initial investment. Not surprisingly, the Vanguard Federal Money Market Fund (VMFXX) is one of the cheapest and highest-yielding options. The Gabelli U.S. Treasury Money Market Fund (GABXX) isn’t nearly as well-known as some of its counterparts but also offers a very competitive yield.
The Bottom Line
Government money market funds provide investors seeking a parking spot for their cash with a low-risk, highly liquid alternative to bank products and traditional taxable money market funds that still offers competitive yields. These funds make sense for those looking to balance out overall portfolio risk or those just seeking an ultra-safe spot to put some money.
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