By Kristin Hovencamp, CPWA®
Whether to hold funds on reserve as part of an asset allocation strategy or for a future liquidity need, investors have cash balances for various reasons. But what if your money is worth less today than it was yesterday? Conservative fixed-income mutual funds, or Money Market Funds (MMF), are a consideration in a higher interest rate environment as a cash alternative.
For investors seeking to generate income from cash, MMF offers the following:
Safety and Stability – Investments held in MMFs may have minimal price volatility, high credit quality, and low levels of risk. MMFs can also help offset the volatility of bonds and equities. The FDIC does not insure MMF.
Liquidity – Assets are commonly available the following business day. It is good to remember that MMF can impose redemption fees or suspend an investor’s ability to sell their shares when selecting the fund(s) that meet your investment objectives.
Shorter duration – MMFs are subject to less interest rate risk due to the types of debt instruments and their short maturity dates. MMF buys securities that mature within one year. However, the fund’s return is not guaranteed to keep up with the inflation rate.
Diversification – MMFs hold many different debt securities from various issuers. Do due diligence on managers, fund objectives, and underlying securities.
Taxable or tax-free income – MMFs can invest in securities exempt from federal and potentially state income taxes.
Yield – MMFs can offer incremental yield in comparison to bank savings accounts. Debt-based securities commonly held in MMF are government securities, short-term treasury securities, taxable and tax-exempt municipal paper, commercial paper, repurchase agreements, and certificates of deposit (CD).
For investors seeking the preservation of capital while taking on minimal risk in exchange for a modest return on cash balances, MMFs could be the right strategy to include in your investment portfolio.
Kristin Hovencamp, CPWA® is an Investment Executive and Director of Business Development with HAZLETT WEALTH MANAGEMENT, LLC, which is independent of Raymond James and is not a registered broker/dealer. Investment advisory services are offered through Raymond James Financial Services Advisors, Inc. Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. 675 Sun Valley Road, Suite J1 + J2 Ketchum, Idaho 83340 208.726.0605.