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Taylor Callery for Money

Here's the most astonishing fact on Wall Street: $2.7 trillion is cooling its heels in money-market mutual funds, earning less than an ant's allowance. The average yield on retail money funds—which invest in short-term government securities, commercial paper, and bank CDs—is a paltry 0.04%.

All that cash is a testament to the durability of money funds as the investor's parking place of choice. A big appeal is convenience. You can move cash from a money fund into your stock fund or bank account swiftly and easily. "They are like the Federal Express of mutual funds: They're for when you absolutely, positively have to have your money overnight," says Peter Crane, publisher of Crane Data.

The new rules

But regulators are imposing new rules later this year that may make it harder to get instant access but that are designed to boost safety.

Through an accounting convention, money funds can keep share prices steady at $1, giving them the illusion of being as risk-free as a bank deposit, though they aren't FDIC insured. If assets slip below $1 a share, the fund sponsor will backstop the fund. But that's not always possible, as in 2008 when the Reserve Fund let its shares fall below $1 in the financial panic.

Starting in October, most institutional money funds—used by the wealthy and pensions and endowments—will have to let their share price float, as any other mutual fund does. On the other hand, retail money funds that are geared to individual investors will be able to keep their $1 share price.

The retail universe includes different types of funds, including government money funds, prime funds that invest in commercial paper, and tax-free money funds that invest in municipal securities.


Going forward, prime and tax-free money funds will have to ensure they have enough cash on hand to handle large redemptions. So both types can institute a 2% redemption fee if their liquid assets fall below certain levels. They can also start imposing a hold, or gate, of up to 10 days on redemptions in times of extraordinary stress.

The time you really need quick access to a money fund, of course, is in a crisis. So if you want to avoid restrictions and fees, use a government fund instead of a prime or tax-free fund. Vanguard says the Vanguard Federal Money Market Fund will be the only money fund its customers can use for brokerage trades after Oct. 14.

The downside, of course, is that government money-market funds pay less—they yield only 0.02%. But tax-free funds are paying only 0.04% while prime funds are at 0.08%. So ironically, today's paltry yields make this choice easier.

Columnist John Waggoner is the author of three books on Wall Street and investing.