Money Market Funds

[tonypeoni]

Would anyone happen to know if there is a limit to the amount one can contribute to a given fund? A steady and safe 4% return is attractive at this point. Is there a limit of 20k, 200k or even 20 million? Not that the latter applies to me

[tabs]

No limit and NO FDIC...There have been 2 occasions where the Buck standard was almost broken with money markets...once in the mid 90's and again in 2008.

[legion]

No limit...unless you use it as a retirement vehicle. The IRA or 401k limits apply, depending on which vehicle you are using.

[tonypeoni]

Forgive me, but at what tax % will the dividend be taxed? 30%+? Is there a capital gains tax on this type of investment?

[aways]

Originally Posted by tonypeoni

Forgive me, but at what tax % will the dividend be taxed? 30%+? Is there a capital gains tax on this type of investment?

Good info here:

Do Money Market Funds Pay?

[dtw]

The buck WAS broken - in 2008 (The Reserve Fund) and in the Clinton years.

While a regular investment isn't capped by any particular law that I'm aware of - you may run into limits & restrictions in any given fund. Some have minimum investments, while others may have caps on maximum placements. Still others are closed to new clients at any given time, for a variety of reasons.

[jyl]

Which money market fund are you looking at? That pays 4%? Not saying you're wrong, just curious.

[74-911]

Originally Posted by jyl

Which money market fund are you looking at? That pays 4%? Not saying you're wrong, just curious.

that makes two of us ????

[trj911]

A money market fund is like a savings account. You can put any amount you want in it. There are a wide variety of MM funds available from taxable to taxexempt. The current yields are at all time lows because short term rates are at 0-0.25%. All funds are paying well less than 1% currently.

[tonypeoni]

Originally Posted by 74-911

that makes two of us ????

Vanguard
https://personal.vanguard.com/us/funds/snapshot?FundId=0083&FundIntExt=INT

[widgeon13]

Originally Posted by tonypeoni

Vanguard
https://personal.vanguard.com/us/funds/snapshot?FundId=0083&FundIntExt=INT

I think that is a treasury fund and not a money market fund, money market fund share prices are always $1.00 share.

[jyl]

That is not a money market fund. Repeat, that is not a money market fund.

That is a bond mutual fund that owns long-term US treasuries.
- The average bond held in the fund has a "coupon" of 5.5%, meaning $1000 of bond is paying $45 in interest each year.
- The average bond held in the fund has a "yield to maturity" of 4.5%, meaning if you bought that bond at the current market value $X of that bond, and held it for a decade or so until the bond matures and the principal is repaid, the total coupons received plus the bond principal paid at maturity would be the equivalent of receiving 4.5%/yr interest on $X.
- The reason the coupon and the yield to maturity are not the same, is because the current market value of the bond, $X, is not the face value of $1,000. The bond currently has a market value higher than $1,000.
- So you see that the market value of bonds can and do change.
- When you buy shares in that fund, the price you pay will reflect the current market value of all the bonds held in the fund.
- When you sell those shares, the price you receive will reflect the then-current market value of all those bonds. That sale price will not necessarily be the same as your purchase price. Because bond market values change.
- Right now, US treasury bonds have high market values, because inflation is non-existent, interest rates are very low, most investors are still seeking safety, and the US government is still viewed as a riskfree borrower. If or when those conditions and perceptions change, the market value of US treasuries will change. If it changes downward, the price of your shares in this fund will go down.
- Maybe the coupon payments (interest) you have received on the bonds will compensate for any decline in the price of the shares. Maybe the price of the shares will go up. Maybe not.

I don't know if all that was more than you really wanted to know. My point is, the yield to maturity of 4.5% does not mean you will make 4.5%/yr on this investment. You should receive, each year, 4.5% times the amount that you initially invested, more or less - unless the fund managers change the composition of bonds held (which they could well do) or they are holding zero-coupon bonds which do not pay a coupon (which isn't super likely) - less the fund's fees and so on. But when you sell the shares, you will not necessarily get back your initial investment.

Want proof? Go to Yahoo Finance and look up the chart for VUSTX. See the volatility in the price? Someone bought that fund at $12.70 in Jan 2009 and it is worth $11 now. Losing 13% of the initial investment in 1 year, partly offset by interest received of course.

A money market fund is different. Those hold interest-paying bonds, notes, commercial paper, etc issued by very credit-worthy governments and companies, that are also very short maturity, meaning the principal will be repaid very soon. Often 90 days. When a bond is very short maturity, its market value usually does not change much. Therefore, the fund never breaks below its initial value when you bought it, which is called "breaking the buck". Unless you have a once-a-generation crisis in the financial markets, like we had last year, when even notes issued by extremely solid companies were plunging in market value. Many money market funds would have broken the buck then, if the Fed hadn't stepped in and essentially put the full resources of the US government behind those funds - that is one way in which the Fed stopped the financial markets from going over the cliff in late 2008 and early 2009.

But, the kind of bond or note suitable for a money market fund pays very low interest. Well under 1% now. Which is why you are not seeing 4% yields from money market funds.

Sorry for the lecture. 20 years ago, when I was a young man, I thought that a bond fund "yielding 5%" meant that I'd definitely make 5%. Wrong, government bonds fell hard in value and I lost money and got an education.

Anyway, I am not a fixed-income expert, I manage equity funds, but the above is pretty basic stuff so I am not blowing smoke at you.

[tonypeoni]

Wow this a lot harder than I anticipated. Even as high gold is now its starting to look attractive.