Top Alternatives to Money Market Mutual Funds
While money market funds work well for parking your surplus cash, several worthy alternatives exist, some of which offer more ideal terms and yields depending upon your specific needs and investable assets.
The alternative that best fits your situation depends upon several factors, including how accessible you want your funds to be and the amount of interest you'll receive for your investment size. Here are some alternatives to money market funds to consider.
High-Yield Savings Account
It might sound old-fashioned, but sometimes nothing beats a simple savings account. Savings accounts generally pay fairly low interest, especially when compared to other options on the list, but there are banking services that specialize in offering high-yield accounts.
These accounts are also easy to open and convenient to use. Banks often have low minimums to open an account. You'll have instant access to your funds, and you can access those funds in a variety of ways, such as through an app, at an ATM, or, in the case of brick-and-mortar banks, at your local bank branch.
When it comes to safety, your money can't be safer than it is in a savings account. Your savings account deposits are fully insured up to $250,000 per institution. Even if your bank goes out of business and shuts its doors, your money should be safe.
Money Market Deposit Account
Although people often get the two accounts confused, a money market deposit account works differently than a money market mutual fund. A money market deposit account, typically offered by banks and credit unions, more closely resembles a savings account.
Some money market deposit accounts even offer check-writing privileges and other features similar to a regular bank account. While this type of account yields higher interest than a bank savings account, it also usually carries a fairly substantial minimum balance requirement.
Certificates of Deposit
Certificates of deposit (CDs) are fixed-income investments that involve depositing, or "lending" money to the issuing bank for a predetermined length of time in exchange for a fixed yield—typically between three months and 10 years. In general, the longer you are willing to lock up your money, the higher the interest rate you'll receive. Once the predetermined time has passed, you'll receive your money back along with the yield earned during the lifetime of the CD.
Depending upon your chosen maturity date, CDs may yield more or less than other options on this list. As with savings accounts, CDs are insured by the FDIC up to the in-effect limits, though you can often extend those limits to as high as $1.25 million through the use of techniques like using payable-on-death designations.
There will likely be downsides to withdrawing money from a CD before its maturity date. The specifics will depend on the institution you use, but you can expect to pay some kind of penalty in exchange for breaking the terms of your CD.
Like CDs, bonds are essentially a loan to an entity in exchange for payments in the form of yield. However, unlike with CDs, your money isn't insured. If you lend money to a business in the form of a bond and that business goes under, you may or may not get your money back—it depends on how the bankruptcy plays out.
A bond can be issued by a variety of entities, including governments, municipalities, and companies.
However, some types of bonds are generally regarded as some of the safest investments available. Perhaps the safest of the safe bonds are issued by the federal Treasury Department. You can open an account with the Treasury through a service known as TreasuryDirect.
A TreasuryDirect account makes it easy to invest your money into Treasury bills, notes, and bonds issued by the government. As such, they are backed by the full faith and credit of the federal U.S. government.
As opposed to individual bonds, which are single debt securities with single entities, bond funds are bundles of debt securities grouped into a single investment product. In theory, this helps diversify the investments and reduce the risk of any single entity defaulting on the bond.
Funds are available with a variety of objectives. There are riskier bond funds that invest primarily in corporate bonds. There are safer bond funds that invest primarily—or entirely—in Treasury bonds.
Bond funds have unique benefits and risks compared to individual bonds. One risk to consider is that a bond fund has no set maturity date on which you're guaranteed to get your initial investment returned.
When it comes to bond funds, you have two primary options: mutual funds or exchange-traded funds (ETFs). Just like with stock mutual funds and stock ETFs, the differences between bond mutual funds and bond ETFs are subtle, but careful investors will notice some key differences.
Bond Mutual Funds
The major difference between the two funds is that mutual funds aren't actively traded on exchanges. Their prices don't fluctuate throughout the day. When you place an order to buy a mutual fund, your order—and any other buy orders submitted in the same period—will trigger simultaneously at a set time of the day (typically as the fund's net asset value is recalculated). This means you have less control over the exact price you'll get, but you know it'll accurately reflect the holdings in the mutual fund.
Bond ETFs seek to combine capital preservation (methods of securing money) with maximum liquidity (ability to convert an asset to cash quickly). You purchase shares in a bond ETF through a broker rather than a mutual fund company.
Bond ETFs are traded on the open market like stock, which means you can buy them on margin or sell them short. It also means that the value of the fund fluctuates throughout the day and may not exactly reflect the underlying value at all times of the day.
However, for active traders, the ability to trade at will throughout the day is a major benefit over mutual fund alternatives. ETFs also typically have lower fees than comparable mutual funds, but that isn't guaranteed.