Investors find money market funds attractive because they come without unnecessary load or burden, such as entry charges or exit charges. Investors only prefer to invest substantial amounts of cash in money market funds for a short-term period because such funds are not suitable for long term investment goals like retirement planning.
What Is a Money Market Fund?
Money market funds are also referred to as money market mutual funds. A money market fund is a mutual fund that puts investments in highly liquid, near-term instruments. Examples of these instruments are cash, cash equivalent securities, and high-credit-rating, debt-based securities with a short-term maturity like the U.S. Treasury Bills.
Managing money market funds entails working on a highly stable asset value through liquid investments while at the same time paying investors in the form of dividends. Hence, money market funds offer high liquidity to investors with a very low-risk level. Although not quite as safe as cash, money market funds are considered extremely low-risk on the investment spectrum.
Do not confuse the Money Market Fund with Money Market Account (MMA). The former carries no principal guarantee while the latter, being insured by the Federal Deposit Insurance Corporation (FDIC), has transaction privileges. MMA is a type of interest-earning savings account that is offered by financial institutions.
How Does a Money Market Fund Works?
Like an ordinary mutual fund, money market fund issues to investors some redeemable units or shares. Investors are protected in the sense that money market funds follow certain guidelines promulgated by the authority, such as the Securities and Exchange Commission or SEC.
A money market fund generates income (taxable or tax-free, depending on its portfolio) but little capital appreciation. Money market funds should be used to park money temporarily before investing elsewhere or making an anticipated cash outlay; they are not suitable as long-term investments.
There are many debt-based financial instruments where a money market fund may invest. Here are some examples:
· Commercial paper.
This is an unsecured short-term corporate debt as any form of collateral does not back it. Commercial paper is usually used to finance short-term liabilities such as payroll, inventories, and accounts payable. The maturity of commercial papers does not take any longer than 270 days.
It is typically issued at a discount from face value, and it usually reflects the prevailing market interest rates.
· Bankers’ Acceptances (B.A.).
These are short-term debt that is guaranteed by a commercial bank. B.A. is a negotiable instrument that functions like post-dated checks work, although it is the commercial bank and not the account holder that guarantees the payment. It is traded at a discount to face value in the money markets.
· Repurchase agreements (Repo).
These are short-term government securities. Dealers sell government securities to investors.
The transaction usually takes place on an overnight basis. These dealers buy back these government securities the following day at a slightly higher price. The gap in the selling and buying price is what they call the implicit overnight interest rate.
It is for this reason that repo is good when it comes to raising short-term capital. The central bank also uses repo to aid open market operations.
· U.S. Treasury Bills.
These are short-term government debt issues.
· Certificates of Deposits (CD).
Banks issue these with short-term maturity. Banks and credit unions offer a CD. CD provides an interest rate premium in exchange for the customer agreeing to leave a lump sum deposit untouched for a predetermined period.
Although almost all consumer financial institutions offer CD, it is the sole discretion of each bank that CD terms it wants to offer, how much higher the rate will be compared to the bank’s savings and money market products, and what penalties it applies early withdrawal.
Types of Schwab Money Market Funds
Money market funds are classified into various types depending upon the class of invested assets, maturity, and other attributes.
Different Schwab Money Market Funds prioritize liquidity, current income, and stability of capital. Some of their common features include having no transaction fees for buying and selling, a minimum investment of as low as $0, and access to tax-exempt money funds. Schwab Money Market Funds give investors a convenient way to access potentially higher cash yields because of these common features.
1. Prime Money Fund
Schwab Prime Money Funds are taxable.
These funds invest in high-quality, short-term money market securities issued by the U.S. and foreign entities, including financial institutions, the U.S. government, and other corporations.
As of December 02, 2020, the 7-day yield (with waivers) of Prime Money Funds like the Schwab Value Advantage Money Fund “Investor Shares” (SWVXX) is 0.03%. The minimum initial investment of this type of Prime Money Fund is $0.
Take note, however, that although the Fund’s Investor Shares have no initial investment minimum, Schwab systems require the minimum payment of $1 per transaction or trade. These minimum initial investments are subject to change. It is, therefore, advisable to check Schwab’s website for these potential changes.
2. Government and Treasury Fund Money Fund
Government and Treasury Fund Money Funds are also taxable.
These funds invest in short-term U.S. government debt securities. A government money fund invests at least 99.5% of its total assets in cash, government securities, and repurchase agreements that are fully collateralized by cash or government securities.
There has been a 0.01% 7-day yield (with waivers) as of December 02, 2020. Likewise, various Schwab Government and Treasury Fund Money Funds require a minimum initial investment of $0, but there are also those that require $1,000,000.
3. Municipal Money Fund
Lastly, Schwab Municipal Money funds are tax-exempt.
These funds invest in short-term municipal money market securities issued by states, local governments, and other municipal agencies. Municipal Money Fund qualifies as a retail money market fund, which means that it is available for investment by natural persons only.
When the shareholder fails to satisfy eligibility requirements for a retail money market fund (for example, when the shareholder is not a natural person as required), the Schwab Municipality Money Fund reserves the right to involuntarily redeem a shareholder’s shares after providing 60 days’ written notice.
Moreover, the fund may also deny the purchase of Fund shares.
For those Schwab Municipal Money Funds that require a minimum initial investment of $0, there has been a 0.01% 7-day yield (with waivers) as of December 02, 2020. Moreover, a 7-day taxable equivalent yield of 0.02% was recorded on the same date.
Schwab Money Market Fund by Category
Before going over the different Schwab Money Market Funds, know what the following means:
The 7-day yield refers to the average income paid out over the previous seven days assuming interest income is not reinvested, and it reflects the effect of all applicable waivers.
The taxable-equivalent yield in the Schwab Municipal Money Funds Table assumes a federal regular income tax rate of 40.80%, which includes a Medicare surcharge rate of 3.8%. Take note, however, that your tax rate may be different.
|Schwab Prime Money Funds|
|Fund Name||7-day yield (with waivers)as of 12/2/2020||Minimum initial investment|
|Schwab Value Advantage Money Fund® Investor Shares (SWVXX)||0.03%||$0|
|Schwab Value Advantage Money Fund® Ultra Shares (SNAXX)||0.03%||$1,000,000|
|Schwab Government and Treasury Money Funds|
|Fund Name||7-day yield (with waivers)as of 12/2/2020||Minimum initial investment|
|Schwab Government Money Fund – Investor Shares (SNVXX)||0.01%||$0|
|Schwab Government Money Fund – Ultra Shares (SGUXX)||0.01%||$1,000,000|
|Schwab Treasury Obligations Money Fund – Investor Shares (SNOXX)||0.01%||$0|
|Schwab Treasury Obligations Money Fund – Ultra Shares (SCOXX)||0.01%||$1,000,000|
|Schwab U.S. Treasury Money Fund – Investor Shares (SNSXX)||0.01%||$0|
|Schwab U.S. Treasury Money Fund – Ultra Shares (SUTXX)||0.01%||$1,000,000|
|Schwab Municipal Money Funds|
|Fund Name||7-day yield (with waivers)as of 12/2/2020||7-day Taxable Equivalent Yields||Minimum Initial Investment|
|Schwab Municipal Money Fund – Investor Shares (SWTXX)||0.01%||0.02%||$0|
|Schwab Municipal Money Fund – Ultra Shares (SWOXX)||0.02%||0.04%||$1,000,000|
|Schwab California Municipal Money Fund – Investor Shares (SWKXX)||0.01%||0.02%||$0|
|Schwab California Municipal Money Fund – Ultra Shares (SCAXX)||0.01%||0.02%||$1,000,000|
|Schwab New York Municipal Money Fund – Investor Shares (SWYXX)||0.01%||0.02%||$0|
|Schwab New York Municipal Money Fund – Ultra Shares (SNYXX)||0.04%||0.07%||$1,000,000|
Which Schwab Money Market Funds is right for you?
Schwab reminds all money fund investors to consider the information contained in the money fund prospectus, or if available, the summary prospectus that includes investment risks, objectives, charges, and expenses.
Besides considering what information is written in the money fund prospectus, you can directly request a mutual fund prospectus by calling Schwab at 1-800-435-4000 to choose the right Schwab Money Market Fund. Once the mutual fund prospectus is provided, make sure to review all the details contained therein to assess the fund’s strengths and weaknesses fully. After doing so, you may confidently choose which Schwab Money Market Fund is the right one for you.
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