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Interest rates climbed higher in 2023, and while that’s generally bad news for borrowers looking to pay down debt, it could be good news for income-seeking investors — especially those who are considering investing in money market mutual funds.
Money market mutual funds are investment vehicles that invest in high-quality, short-term debt securities, and pass the interest payments on to investors. Like many index funds and other mutual funds, money market mutual funds only change price once each trading day.
» Looking to learn about exchange-traded funds? Check out some of the best ETFs in terms of performance
Some money market mutual funds now pay substantial yields — and while they’re not risk-free, they’re typically considered lower-risk than most other types of mutual funds. It’s just a matter of finding the right one for your portfolio.
5 best money market mutual funds by yield
Below is a list of the five highest-yielding money market mutual funds that have at least $1 billion in assets.
Symbol | Fund Name | Yield |
|---|---|---|
AGQXX | U.S. Government Money Market | 4.80% |
VYFXX | Vanguard New York Municipal Money Market Fund | 3.32% |
LTFXX | Western Asset Select Tax Free Reserves | 3.24% |
SWWXX | Schwab AMT Tax-Free Money Fund | 3.08% |
SWKXX | Schwab California Municipal Money Market Fund | 2.81% |
Source: MutualFunds.com. Data is current as of market close on May 1, 2024 and is for informational purposes only.
You may be seeing that some of the funds above are called “government” money market funds, while others are specified as “municipal” money market funds. These refer to separate types of money market funds — and it’s important to understand the differences between them.
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Types of money market funds
The three types of money market funds are government money market funds, municipal money market funds and prime money market funds. Each type has a slightly different investment profile and tax treatment.
Government money market funds
Government money market funds invest at least 99.5% of their money into highly liquid, government-backed assets such as cash, short-term U.S. government debt and repurchase agreements backed by government debt.
Income from these funds is subject to federal income tax, unless it is held in a tax-advantaged account such as an individual retirement account (IRA).
Some of the assets in government money market funds, such as Treasury bills, generate income that is usually exempt from state and local taxes. However, some of the other assets, such as repurchase agreements, are subject to those taxes — so it’s a good idea to assume that government money market fund income is subject to those taxes as well.
There is, however, another type of money market fund whose income can be exempt from both federal and state taxes, under the right circ*mstances. That's the municipal money market fund.
Municipal money market funds
Municipal money market mutual funds — also known as tax-free money market mutual funds — invest in short-term municipal debt.
The income generated by these funds — like the income generated by municipal bonds themselves — is exempt from federal income taxes. Most states also exempt their own municipal bonds from state income taxes.
So depending on where you live, you may be able to find a municipal money market fund whose income is exempt from both federal and state taxes. Look for a fund that invests specifically in municipal debt from your state of residence.
Prime money market funds
Prime money market mutual funds invest in short-term corporate debt, rather than government debt.
The income generated by prime money market funds — like the income generated by corporate bonds — is fully taxable, unless it is held in a tax-advantaged account.
Money market mutual funds vs. money market accounts
Money market funds and money market accounts have similar names, invest in similar assets and pay similar yields. The major differences between money market mutual funds and money market accounts are features, tax treatment and Federal Deposit Insurance Corporation (FDIC) coverage.
The table below can help clarify them.
Symbol | Fund Name | Yield |
|---|---|---|
SWWXX | Schwab AMT Tax-Free Money Fund | 3.03% |
VYFXX | Vanguard New York Municipal Money Market Fund | 3.03% |
USEXX | Victory Tax Exempt Money Market Fund | 2.80% |
SWKXX | Schwab California Municipal Money Market Fund | 2.78% |
VCTXX | Vanguard California Municipal Money Market Fund | 2.63% |
How to choose a money market fund
See what’s available in your brokerage account
Not every money market mutual fund is available in every brokerage account. Some brokers that are also mutual fund custodians — Fidelity, for example — only offer access to their own money market funds.
» Not satisfied with your broker’s offerings? See our list of the best brokers for mutual funds.
Decide which type of money market fund is right for you
The type of investment account you’re using may also be relevant to your choice of money market mutual fund.
An in-state municipal money market mutual fund can provide you with completely-tax-free income — a valuable benefit if you’re investing through a taxable brokerage account.
But if you’re investing through a tax-advantaged account such as an IRA or health savings account (HSA), then you don’t need to worry about taxes in the first place, and you may want to pick the highest-yielding fund available instead.
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Check yields, fees and expense ratios
Yield isn’t the only number you should look at when you’re shopping for a money market mutual fund.
Mutual funds also have expense ratios, or annual percentage fees. Many also have one-time buying or selling fees. When evaluating funds, it’s good to subtract expense ratios from yields — and also consider other fees — to determine which fund is the best-paying.
» Wondering how to get started? Check out our roundup of the best brokers for beginners.
Neither the author nor editor held positions in the aforementioned investments at the time of publication.
