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Investors can’t get enough of money market funds these days due to their attractive yields, which are north of 5%. In fact, some $960.2 billion flowed into money market funds so far this year, compared to just $164.6 billion into fixed income exchange-traded funds and $225.7 billion into equity ETFs, according to Strategas. Yet, while the assets may be a great place to hold cash, you might want to consider looking elsewhere for longer-term income. “The yields are really ephemeral. You are not locking anything in,” said Christine Benz, director of personal finance and retirement planning for Morningstar. “It is going to ebb and flow with anything going on in the interest rate environment.” The Federal Reserve hasn’t ruled out another rate hike in December. Overall, money market fund assets have increased $995.8 billion, or 19.7%, over the past 12 months, according to Crane Data , a firm that tracks money markets. In October, the largest increases among the 25 biggest managers included Charles Schwab , which grew assets by $18.8 billion that month, and Fidelity , with $17.4 billion in asset growth, per Crane Data. Federated Hermes, DWS and Vanguard were also among those that saw asset growth of $7.4 billion, $3.9 billion and $2.7 billion, respectively. After a brief dip in flows in October because of tax payments being due, assets in money market funds are climbing up once again and should continue to push higher over the next two months, said Peter Crane, founder of Crane Data. Investors should remember it is important to stay diversified and to know what you’ll need the money for, whether it is an emergency fund, a longer-term savings goal like a down payment for a house or retirement. “The starting point for your investment decisions should always be your proximity to needing your money and let that determine how you allocate your investments,” Benz said. When money market funds work Those who need easy access to cash could benefit from the money market funds’ liquidity, which is one of the asset’s biggest advantages, Benz said. The other advantage now is their yields, she added. The annualized 7-day yield on the Crane 100 list of the 100 largest taxable money funds is currently 5.19%. Money market funds can also be more convenient than other income-yielding plays, since they are also offered by banks and credit unions, said certified financial planner Barry Glassman, president of Glassman Wealth Services. However, unlike bank savings accounts, money market funds are not insured by the Federal Deposit Insurance Corporation. That said, the funds have historically been quite safe, Benz noted. Just be aware of what fees you are being charged, she advised. “Money market funds at some firms are a big money maker and they manage to earn good profits on those products by underpaying investors in terms of interest rates,” she warned. “Investors need to watch that carefully.” Looking elsewhere If there is cash you don’t need immediate access to, you may consider a certificate of deposit or other fixed-income instruments. Some banks are even offering 1-year CDs with yields over 5% . Just remember you typically get penalized for withdrawing funds before the CD matures. “If you have a longer time horizon and a specific goal, then by all means think about adding some investment where you would be locking in your higher interest rate over a longer time frame,” Benz said. “CDs can be really attractive in that context.” While money market funds may be yielding more than longer-term Treasurys or investment-grade bonds right now, that isn’t necessarily always going to be the case. “Why would someone invest in a 5-year Treasury note when a money market fund is yielding higher? The reason is the forecast that people have is that rates are going to come down and they will be grateful with the yield that is currently lower but is locked in for a longer period of time,” said Glassman, a member of the CNBC Financial Advisor Council . As always, diversification is key. With a bond portfolio, Glassman suggests laddering up to five years, dividing each maturity into fifths. Stocks should also be a part of your overall investment portfolio if you have a long-term horizon, Benz noted. Those are the asset class that has historically done the best job of outearning the inflation rate, she said. — CNBC’s Jesse Pound contributed reporting.
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