Options for money market investors

U.S. Securities and Exchange Commission has declined to U.S. Securities and Exchange Commission has declined to impose extra rules on the $2.44 trillion money market mutual funds industry. (July 3, 2012) Photo Credit: Getty Images

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Individual investors may be wondering where best to park their cash, now that the U.S. Securities and Exchange Commission has declined to impose extra rules on the $2.44 trillion money market mutual funds industry.

Savers and investors use these funds -- which typically invest in government bills, very short-term bank certificates and other loans and keep their prices set at $1 a share -- to keep money liquid.

But after the 2008 financial crisis produced a run on the Reserve Primary Fund, the nation's oldest money market fund, regulators took note. SEC Chair Mary Schapiro wanted additional safeguards, such as higher reserve requirements or a floating share price. But in the face of heavy industry lobbying, she was unable to convince a majority of SEC commissioners last month.

While she is encouraging other agencies to step in, investors and savers must decide for themselves whether the funds -- which are historically considered very safe but are not guaranteed -- are worthwhile places to keep their money.

The average yield on taxable money market funds is now 0.02 percent, according to iMoneyNet, a research firm. That's not really enough return to justify even a little bit of risk-taking, according to many money managers.

Here are some more tips for savers and investors:

Know the difference between a money market fund and a bank's money market deposit account. A money market deposit account at the bank acts much like a money market mutual fund, but it is Federal Deposit Insurance Corp insured. The bank versions currently have an average yield of 0.49 percent, according to Bankrate.com. So savers can get better returns and FDIC backing.

Consider alternatives. Levin has been putting extra client cash into 5-year bank certificates of deposit (CDs) that have higher yields but only charge a two-month penalty for cashing in early. Short-term bond funds and ultra-short bond funds could be an option, especially for someone with a large cash cushion who is saving for a down payment on a house or paying for college. The yields have been a bit higher with "little volatility," says Rebecca Hall, a private wealth adviser with Ameriprise Financial in Reston, Va.

Ladder CDs. Bank certificates are insured by the FDIC or the National Credit Union Administration. They have a fixed rate for a specific term such as three months, six months, one year. Investors can distribute their money into CDs with a variety of maturity dates, or use a portion of their money to buy longer-term CDs every few months. This technique, called "laddering," allows them access to cash whenever the CDs come due, but also allows them to capture higher rates.

Stay covered. But don't rush to the bank and ladder that cash without considering FDIC limits, currently $250,000 per ownership type. That means a couple with $750,000 could insure the entire amount by opening three accounts with $250,000 in each -- two individual accounts (one in each of their names) and a joint account, Hall notes.What to watch for

Avoid the big payouts. If a money market fund is paying a higher yield than other funds, they're likely taking on more risk. Check the prospectus for red flags.

Look for government money. For added peace of mind, focus on funds that invest in government-issued debt.

Be patient. While interest rates currently are at historic lows, eventually they'll rise.

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