The Vanguard Prime Money Market Fund (NASDAQMUTFUND: VMMXX) is one of Vanguard's lowest-risk investment options. Best for short-term savings, the fund offers competitive interest rates and a stable share price. However, for investors seeking any acceptable level of long-term investment performance, it's generally best to look at other options.
What is the Vanguard Prime Money Market Fund?
The Vanguard Prime Money Market Fund is designed as an alternative to keeping money in cash, or in a savings account. The primary objective is to preserve investors' principal by maintaining a portfolio of short-term, high-quality assets. This includes CDs, short-term U.S. Treasury Bills, and other money market assets. 100% of the fund's investments are of top credit quality (in the top two possible credit categories), and the average maturity of the fund's assets is just 39 days.
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The fund maintains a share price of $1.00 at all times and makes income distributions on a monthly basis. Since the fund invests in short-term money market instruments, it tends to pay a relatively low yield, but it can fluctuate considerably depending on the interest rate environment.
As of this writing, the fund's distribution yield is 0.48%, but it has been as low as 0.01% in recent years. However, the fund's average return since its 1975 inception has been 5.18%. When interest rates normalize, the fund's yield should rise to a level closer to that historic average, and as you can see, there have been times in the past when the fund's yield was significantly higher than the average.
VMMXX Dividend Yield (TTM) data by YCharts.
The fund's current expense ratio is 0.16% and requires a minimum $3,000 initial deposit. For investors with extremely large stockpiles of cash ($5 million or more), the fund is also available in Admiral Shares, which have a lower 0.10% expense ratio. Investors have the ability to transfer money electronically to and from their bank account, so the fund is designed to be just as convenient as a savings account, but with a slightly higher yield.
Advantages
There are a few advantages to investing in the fund. To name a few of the best ones:
- Stability: The fund maintains a $1.00 share price. In other words, the risk of losing your investment principal is virtually zero.
- Liquidity: The shares can be readily redeemed for $1.00.
- Low cost: The fund's expense ratio is just 0.16%.
- Income: The Vanguard Prime Money Market Fund pays a better yield than most savings accounts, checking accounts, and short-term CDs do. Although the fund's current annualized yield is only about 0.50%, it's far better than the sub-0.10% returns many savings accounts are offering.
- Monthly income: The fund distributes income to investors on a monthly basis. This could become a more attractive benefit once interest rates normalize, but it's still better than having to wait for a quarterly or annual payout.
However, investors should consider the following drawbacks:
- Low yield: Compared with bonds and dividend stocks, money market assets don't pay very much. Investors who want income on a long-term basis can get significantly higher checks by investing in bonds, without taking on much more risk.
- Purchasing power decline: While the fund generates some income, it's important to point out that its returns are unlikely to keep up with inflation, especially in the near term. For example, if the inflation rate is 2% and the fund returns only 0.5%, your investment is actually losing 1.5% in purchasing power each year.
- No principal appreciation: The Prime Money Market Fund maintains a $1.00 share price, no more, no less. So, while you won't lose money, you don't have the potential to make any either.
Who should invest in the fund?
I'd recommend the Vanguard Prime Money Market Fund as a short-term investment vehicle only. For example, if you have $10,000 that you know you'll need in two months to pay for your kid's college tuition, the fund is a good way to ensure that you won't lose any of it, and to generate a little bit of income at the same time. Or, if you have some emergency savings and don't want to risk losing any of it by investing, this could be a good option.
As far as a long-term investment, I suggest that virtually 100% of all investors' portfolios be in either stocks or bonds (or funds that invest in them). Stocks provide the growth younger investors need, and bonds can provide the income retirees need without excessive risk. If you're retired and feel more comfortable with some cash, this could be a good option for a small percentage of your portfolio, but that's about it.
Matthew Frankel has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
FAQs
At least 99.5% of their assets are backed by the full faith and credit of the U.S. government. While money market funds aren't FDIC-insured, investments held in brokerage accounts (including money market funds) may be insured by SIPC.
What happened to Vanguard Prime money market fund? ›
VALLEY FORGE, PA (August 27, 2020)—Vanguard today announced the following changes to its taxable money market fund lineup: Vanguard Prime Money Market Fund will be reorganized into a government money market fund and renamed Vanguard Cash Reserves Federal Money Market Fund.
What are the risks of Vanguard money market fund? ›
Because the fund's income is based on short-term interest rates—which can fluctuate significantly over short periods—income risk is expected to be high. Manager risk: The chance that poor security selection will cause the fund to underperform relevant benchmarks or other funds with a similar investment objective.
What are the risks of prime money market funds? ›
Because they invest in fixed income securities, money market funds and ultra-short duration funds are subject to three main risks: interest rate risk, liquidity risk and credit risk.
Is my money safe in Vanguard money market fund? ›
Money market funds held in the account are not guaranteed or insured by the FDIC, but are securities eligible for SIPC coverage.
Can Vanguard money market funds lose money? ›
Can I lose money when I invest in money market funds? Yes. Although money market funds seek to maintain a stable $1 share price, capital preservation is not guaranteed.
What happens if Vanguard goes bust? ›
The securities that underlie the funds are held by a custodian, not by Vanguard. Vanguard is paid by the funds to provide administration and other services. If Vanguard ever did go bankrupt, the funds would not be affected and would simply hire another firm to provide these services.
Why are investors pulling money from Vanguard? ›
When the market cratered, investors withdrew $16.4 billion from Vanguard's index mutual funds. What accounts for remaining index mutual fund outflows? Johnson says it could be clients pulling out money because they're retiring, or because they're negatively affected by the pandemic.
Why not invest in Vanguard? ›
Vanguard is the king of low-cost investing, making it ideal for buy-and-hold investors and retirement savers. But beginner investors and active traders will find the broker falls short despite its $0 stock trading commission, due to the lack of a strong trading platform and accessible educational resources.
Is it safe to keep money in money market fund? ›
First and foremost, money market accounts are typically safe because they're insured by the federal government. If you open a money market account at a federally insured bank, the Federal Deposit Insurance Corp. (FDIC) insures up to $250,000 of your cash per bank, per depositor.
Low Risk and Short Duration
As stated above, money market funds are often considered less risky than their stock and bond counterparts. That's because these types of funds typically invest in low-risk vehicles such as certificates of deposit (CDs), Treasury bills (T-Bills), and short-term commercial paper.
What are two disadvantages of a money market fund? ›
Key takeaways
Disadvantages of money market accounts may include hefty minimum balance requirements and monthly fees — and you might be able to find better yields with other deposit accounts.
Are prime money markets safe? ›
Finally, prime money market funds are considered to be riskier than the other types of money market funds because they tend to invest in corporate commercial paper, along with repurchase agreements, certificates of deposit, and other bank debt securities.
What is the safest type of money market fund? ›
Like VMFXX, NCGXX is a government money market fund and is subject to the same restrictions. Currently, the fund's portfolio consists of numerous Treasury bills, which are among the safest of assets due to their ironclad credit quality and low interest rate sensitivity.
Is there risk in losing money in a money market account? ›
MMAs typically do not have account maximums. However, if your balance exceeds the relevant FDIC or NCUA deposit insurance limits, you would risk losing funds in excess of those limits.
Does Vanguard have a prime money market fund? ›
Vanguard Prime Money Market Portfolio | Vanguard.
Are government money markets safer than prime money markets? ›
Prime money funds that invest in floating-rate debt and non-Treasury commercial paper assets such as government-sponsored enterprises, government agencies, and those issued by corporations. These carry moderately higher risk than a government money market fund, and in turn tend to have higher yields.
What interest rate does Vanguard Prime money market pay? ›
For the 12 months ended August 31, 2019, Vanguard Prime Money Market Fund returned 2.36% for Investor Shares and 2.42% for Admiral Shares. Vanguard Federal Money Market Fund returned 2.26% and Vanguard Treasury Money Market Fund returned 2.25%. All three funds surpassed the average returns of their peers.
Are Vanguard brokered CDs FDIC insured? ›
All of the CDs offered by Vanguard Brokerage are FDIC-insured.
