The Fed's recent interest rate cut of half a percentage point is affecting money market funds.
With the Fed funds rate now at a shockingly low 1.25%, short-term investments made by money market funds don't yield much more, and that's putting pressure on the funds.
According to iMoneyNet, the average taxable money market fund yields 1.21% percent now (1.22% for the average tax-free fund). When you factor in a fund's management fee, not to mention the marketing fees some funds charge to reward the brokers that sell them, well, there's not much left.
Currently, about 384 money market funds sport yields of 1% or lower, and that's likely to drop as the short-term securities these funds own mature in the next few months and are replaced by new investments with lower interest rates.
According to a Reuters report, about 73 funds already have yields below 0.50%, suggesting they may soon drop into negative territory. The solution? Well, there's no silver bullet, here. Many funds will likely lower their fees to plump up their yields. Meanwhile, many investors are looking elsewhere. Money market funds are among the safest places to park your pesos, but it can be hard to justify doing so when your reward is almost nil.
Fools are encouraged to shop around. Learn more about your short-term savings options (which include higher-yielding certificates of deposit, for example) at Bankrate.com and our Short-term Savings Center. (We've got some good deals for Fools, negotiated for you with MBNA.)
Also, remember that your long-term money is likely to do best for you invested in the stock market. If you need a new brokerage or a better brokerage, learn more at our Discount Broker Center. And finally, understand that for many of us, the best long-term choice is a simple index fund -- it takes hardly any research and will nearly mirror the stock market's return in the years to come.
