WHEN IT comes to your money and financial hazards, it's not always such a good idea to seek out "any port in a storm." Money market mutual funds are the ultimate safe-harbor investment, but the seas can still be plenty rough if you pick the wrong one. Couple safe-but-boring returns with high fees or penalties and you're sure to be disappointed with the results.
With the stock market struggling to recoup losses and recapture growth, investors have been pulling billions of dollars from stock funds and pouring them into money funds. On the off chance that you are one of those people - or that you could be in the future - it's a good time to revisit the key factors in selecting a money fund.
Money funds are an easy-to-find, easy-to-choose option for your most conservative money. The method for picking one runs counter to the advice investors normally hear.
With stock and bond funds, the usual warning is to shun the hot performers to avoid any swift, sudden turnarounds.
In money funds, however, the best place to start your search is with the very top gainers. (You can get a good list at www.imoneynet.com.) To see why, let's cover some background on money funds and how they work.
Money market mutual funds invest in short-term instruments such as certificates of deposit and Treasury bills. Some create extra tax and safety benefits by purchasing only certain assets, such as municipal or government bonds.
The result is a fund with three key features: liquidity, safety and yield. Investors should decide which of those traits they most value - if it's safety, you might pick a fund that is 100 percent invested in Treasury securities, for example - and then pursue the right fund.
Most money funds have check-writing privileges, which make them a potential substitute for a checking account. Unlike bank accounts, money funds are not insured against loss, however.
The share value is a constant $1. Whenever the fund earns money - something that would ordinarily make the share price increase - it simply passes that dividend along to you in the form of additional shares. So, loosely speaking, if a fund has a 5 percent yield and you hold it for a year, every share you own will grow to be 1.05 shares.
Because of the rules governing money funds, virtually all are created equal. What separates a top money fund from the average is the amount of expenses charged to investors.
According to Connie Bugbee, editor of the Money Fund Report produced by iMoneynet.com, the average retail money fund currently carries a 0.74 percent expense ratio.
It's a lot less for the top funds, however, with half of the top 10 funds waiving some or all of their costs. (Currently, the only fund offering a complete fee waiver is Zurich YieldWise Municipal, while the highest expense ratio belongs to Delaware Cash Reserves B and C classes at 1.93 percent.) Because the holdings are so similar, the difference in yield between leaders and laggards is in the cost structure.
Waiving expenses is how fund companies attract money. Over time, however, most firms turn up the heat on that cash, raising management fees toward the norm and hoping that investors stay put.
Today's great fund could be tomorrow's middle-of-the-road offering if management cuts or discontinues a fee waiver.
That's why yield-hungry investors should consider dumping any fund that can't hold its place near the top of the charts.
Says Bugbee: "I'd never pay above 1 percent and would hesitate to pay 0.75 percent. I'm a firm believer that there are costs to these things, but paying too much for them is a waste of money." Beyond yield and safety concerns, a money fund becomes a convenience item. Match your needs to a fund's features.
If the fund is to function as a surrogate checking account, make sure any restrictions on the allowable number of checks or the minimum size of checks written each month are reasonable. Some money funds with check-writing limits impose big fees when you write additional checks; these kinds of penalties will quickly outweigh a fund's low expense ratio.
If your plan is to put the money back into stocks quickly and you want to avoid the lag time of moving checks around, the choice might be the fund offered by your primary fund or brokerage firm.
The minimum size of the account also can be an issue. Some of the funds with the best yields accept only accounts with $25,000 or more.
Learn the rules (and the consequences of breaking them) so you get the safe harbor you seek without the frustrations of landing in the wrong place.
In short, pick the fund that combines the features you want with the best available yield.
Chuck Jaffe is mutual funds columnist at the Boston Globe. He can be reached by e-mail at firstname.lastname@example.org or at the Boston Globe, Box 2378, Boston, Mass. 02107-2378.