Tips for Buying Money-Market Mutual Funds

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The Associated Press

Money-market mutual funds became popular places to safely park cash amid the beating that stocks and bonds took in the market meltdown. But since then, typically small money-fund yields have shrunk to record lows, and many investors have pulled out. Still, with interest rates also near zero and with nowhere to go but up, money funds could see some investors return. That's because their yields rise along with interest rates. Here are tips on how to find the best money funds:

1. FIND THE RIGHT FIT. While their returns are near zero across the board, different types of money funds invest in different types of bonds.

So, pick the right type to balance how much safety you're willing to give up for a slightly higher yield. Many funds buy super-safe government bonds such as Treasury bills, and generally carry the lowest yields. So-called prime funds seek slightly higher yields but accept marginal risk by venturing into some forms of corporate bonds, which carry the risk of default.

2. CONSIDER YOUR TAX SITUATION. Tax-free money funds could be a better bet than taxable ones if you're holding the fund outside a tax-protected retirement account, such as a 401(k), and your income puts you into a high tax bracket. The tax-free variety are usually labeled as such, and invest in bonds issued by state or local governments. If your state's taxes are high, bonds issued by your home state could be a good pick.

3. CHECK EXPENSES. Fund expenses are a big consideration. That's because a small difference in the amount you pay can offset the small yield of a money fund. Generally, look for expense ratios below 0.4%. That's the percentage of assets a fund charges for operational expenses. Bigger funds typically charge lower fees because they can be run more efficiently.

4. AVOID CHASING YIELDS. Resist the temptation to buy a money fund just based on a higher yield. Try to determine what risks the fund may be taking to generate the higher return — such as a soured investment in Lehman Brothers bonds, that ultimately caused investors in one fund to lose some money in late 2008.

Copyright 2010 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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