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Money-Market Funds Face an Uncertain Future

The exodus began during the financial crisis when investors feared losses. Since then, shareholders have continued leaving money-market funds in search of higher yields.

Yields on money funds remain minuscule. According to Crane Data, the average yield is 0.06%. That skimpy payout is not likely to rise anytime soon because the Federal Reserve is committed to keeping short-term rates low at least until 2014.

Even with their tiny yields, money-market funds can still serve an important function for investors who want a convenient parking place for cash. But for safety, stick with funds offered by companies with deep pockets, such as Fidelity Investments or Vanguard Group. If those money-market funds run into trouble, you can bet that the parent companies will bail out shareholders rather than suffer negative publicity.

To boost the returns of your portfolio, keep as little as possible in money markets. If you are willing to tie up funds for a year, you can get yields of 1% on bank certificates of deposit, which are insured by the FDIC.

To do better than that, you will have to take on risk.

A sound option is to shift some money to ultrashort bond funds. While money-market funds must have average weighted maturities of 60 days or less, the ultrashort funds focus on securities with maturities of one or two years.

During the financial crisis, many of the ultrashort funds were slammed when mortgage securities crashed. But these days funds that focus on high-quality investments offer plenty of safety.

A sound choice is William Blair Low Duration (WBLNX), which has a current yield of 1.28%. The fund keeps most of its assets in government-backed securities with AAA ratings. The fund has a duration of about one year. So if interest rates rise by one percentage point, the fund could lose 1%.

Stan Luxenberg is a freelance writer specializing in mutual funds and investing. He was executive editor of Individual Investor magazine.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
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