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With such vigorous returns from the stock market, you’re probably wondering why anyone would suggest that you park your hard-earned dollars in a money fund. Deborah Frazier, vice president and senior financial consultant of Merrill Lynch’s Private Client Group, says: “Some clients think that [if] they have 50% in growth stocks and 50% in the money market, they are diversified. I advise [my clients] against taking large positions in money market funds.”
But that doesn’t mean that you should shun the instruments and other cash equivalents altogether. Depending on your age, investment goals and risk-tolerance level, experts advise that you place at least 5% to 20% in cash. (See asset allocation in this section.) And financial planners maintain that you should have 3-6 months of cash and cash equivalents — your checking account, savings account, certificates of deposits and such — on hand for emergencies. According to Ilyce R. Glink, the author of 100 Questions You Should Ask About Your Personal Finances (Random House, $ 19), you should move enough money into your noninterest-bearing checking account to pay your bills, while a larger reserve should be kept in money market accounts — preferably those found at mutual fund companies — to gain a higher rate of return.
Despite all the hoopla about stocks, money funds are still fairly popular. According to Ashland, Massachusetts-based IBC Money Fund Report, assets of the 898 taxable funds rose $ 5.3 billion to $ 1.2 trillion in late January. On average, the taxable fund investments, which include short-term commercial paper and Treasury bills, mature in 54 days while tax-free funds have an average maturity of 42 days.
So if you err on the ultra-conservative side, they provide safety in an uncertain world. Like a value fund manager storing reserves, you should use money market funds, CDs and the like to provide an interest-bearing mattress to stash your cash under while you wait to pounce on the next opportunity. Remember that if you put your money in a CD, you can’t touch it until the maturity date or risk a huge penalty for early withdrawal.
In order to figure out how to get the best return for your buck, we have identified the top-yielding money market mutual funds and certificates of deposits. Be selective. Keep in mind that even though inflation is at a miniscule 1.5%, it can still eat up some of your return. Moreover, look for those funds that have waived a portion of their fees.