Risk management is a key component of successful investing. If you don’t manage your risk properly, you can expose yourself to significant losses when the stock market enters a correction.
Some people prefer less volatility and steady cash flow compared to the booms and busts of growth stocks. Investors with this mentality often turn to money market funds, a group of assets that tend to maintain steady price points while delivering high yields for investors.
[Sign up for stock news with our Invested newsletter.]
Money market funds usually provide higher returns than traditional savings accounts and offer high liquidity. You can access cash from a money market fund quickly without worrying about how many withdrawals you make in a given month.
Money market funds do not have Federal Deposit Insurance Corp., or FDIC, insurance. That means they don’t have the same insurance as the money you leave in the bank.
However, these funds invest in short-term government bonds and other low-risk assets. Fund managers aim to preserve a net asset value, or NAV, price of $1 per share. Investors can choose whether to receive cash flow from their position or reinvest it into the money market fund.
Why Invest in Vanguard Money Market Funds?
Many brokerage firms offer money market funds, but few of them match the low expense ratios that helped turn Vanguard into a juggernaut. Low expense ratios allow you to keep more of the fund’s returns. This ratio reflects the cost of doing business with a managed fund. You’ll typically get a lower expense ratio if you invest in passively managed funds over actively managed funds.
Although the Federal Reserve cut interest rates three times in 2024, rates still remain elevated. High interest rates present an opportunity for investors who want to reduce risk and generate cash flow from money market funds.
During periods of elevated interest rates, investors get higher cash flow from money market funds and may see losses in growth stocks. Money market funds can offer some stability for investors who prioritize equities.
Money Market Fund Risks to Keep in Mind
Although money market funds can provide low-risk cash flow that’s higher than most savings accounts, these assets come with some concerns to keep in mind. These are some of the factors to consider before allocating cash into money market funds.
Interest Rate Risk
Soaring interest rates put money market funds on the map in 2022, but interest rates have been dropping in recent years. Those drops may continue in 2025 and affect money market funds. These funds rely on high interest rates to deliver elevated cash flow to their investors. If the Fed continues to reduce interest rates, money market fund returns will fall with rates. Lower interest rates also make equities more attractive and can cause investors to shift money out of these funds.
One way to deal with lower interest rates is to lock in a good rate for a longer period. For instance, certificates of deposit let you lock in rates for a few years. You can adjust a CD’s term based on how soon you want to access your cash.
Inflation Risk
Inflation silently impacts the real returns of your investments. If a fund yields 3% but inflation is at 2%, then your real return is only 1%. That’s before taxes, which will apply to money market funds. Taxation on distributions varies with many factors, but any interest income is treated as ordinary income.
Some money market funds can produce negative real returns after adjusting for inflation and taxes. Stocks have a better chance of outperforming inflation, especially during bullish economic cycles. While investors may prefer the stability of money market funds, it’s important to assess the gap between your interest rate and the rate of inflation.
Default Risk
It’s possible for a bond issuer to default and be unable to pay an obligation. This outcome would hurt the fund’s value but is extremely unlikely because money market funds prioritize short-term bonds.
That said, Vanguard has several funds that offer investors cash flow, stability and low expense ratios. Here are five of the best money market funds available from Vanguard:
| Money Market Fund | Expense Ratio | Minimum Investment | 7-Day SEC Yield as of May 7 |
| Vanguard Federal Money Market Fund (ticker: VMFXX) | 0.11% | $3,000 | 4.23% |
| Vanguard Treasury Money Market Fund (VUSXX) | 0.07% | $3,000 | 4.23% |
| Vanguard New York Municipal Money Market Fund (VYFXX) | 0.11% | $3,000 | 2.45% |
| Vanguard California Municipal Money Market Fund (VCTXX) | 0.12% | $3,000 | 1.84% |
| Vanguard Municipal Money Market Fund (VMSXX) | 0.11% | $3,000 | 2.50% |
Vanguard Federal Money Market Fund (VMFXX)
The Vanguard Federal Money Market Fund has been around since 1981, has a 0.11% expense ratio and requires a $3,000 minimum investment. Investors right now enjoy a seven-day SEC yield of 4.2%, and the actively managed fund is also up by 1.5% year to date as of May 7.
VMFXX invests most of its capital in U.S. government securities. The fund prioritizes short-term government bonds, which makes income more sensitive to changes in interest rates. The fund has 293 total holdings with an average maturity of 35 days. VMFXX closed out April with $351 billion in total net assets.
Although bond holdings have interest rate sensitivity, government bonds overall are some of the safest investments available. The government can always print more money if it needs to cover any bond payments.
Vanguard Treasury Money Market Fund (VUSXX)
The Vanguard Treasury Money Market Fund also requires a $3,000 minimum investment to get started, and it also has a year-to-date return of 1.5%. Its seven-day SEC yield stands at 4.2%, and its expense ratio is only 0.07%.
The fund invests at least 80% of its assets in debt issued directly by the U.S. government. The actively managed VUSXX currently has 96.7% invested in U.S. Treasury bills and 3.3% in U.S. government obligations.
The fund has 29 holdings with an average maturity of 42 days. VUSXX prioritizes high cash flow and liquidity, and that strategy has attracted $92 billion in assets.
Vanguard New York Municipal Money Market Fund (VYFXX)
The actively managed Vanguard New York Municipal Money Market Fund also has a $3,000 investment minimum, but it has some notable differences in expense ratio and yield from some of the other funds on this list.
New York investors still get a low 0.11% expense ratio, which is only slightly higher than the other funds’ costs. Investors also receive a 2.4% seven-day SEC yield as of May 7. The fund is designed for New Yorkers in a higher tax bracket who have a short-term savings goal and don’t want to pay taxes on their cash flow. It’s also considered one of Vanguard’s most conservative investment options, according to the fund website. At least 80% of the fund’s total assets are in high-quality, short-term New York municipal securities.
VYFXX prioritizes securities that are exempt from federal and New York personal income taxes, and it aims to maintain a net asset value of $1 per share. It has 332 holdings with an average maturity of nine days. The shorter maturity date means the fund won’t enjoy the same gains in principal value that longer-dated funds would if the Fed conducts rate cuts in 2025. VYFXX has $3.5 billion in total net assets and is on a monthly distribution schedule.
Vanguard California Municipal Money Market Fund (VCTXX)
This actively managed fund is a California resident’s equivalent of VYFXX. It seeks to invest at least 80% of its assets in high-quality, short-term California municipal securities that are exempt from federal and state income taxes. Right now, all of its funds are invested in those types of securities.
VCTXX has a 0.12% expense ratio and a 1.8% seven-day SEC yield as of May 7. The fund requires a $3,000 minimum investment to get started. VCTXX has 221 holdings with an average maturity of eight days. It’s a low average maturity for investors who are worried about rate cuts, but the fund still has desirable tax benefits for Californians.
These concerns haven’t spooked investors. They have poured $3.8 billion into the fund and reap monthly distributions from VCTXX in return.
Vanguard Municipal Money Market Fund (VMSXX)
The Vanguard Municipal Money Market Fund offers broader exposure to municipal bonds for investors who aren’t located in New York. Started in 1980, the actively managed fund has a 0.11% expense ratio and a 2.5% seven-day SEC yield. You’ll have to deposit at least $3,000 to start a position in this fund.
The fund maintains a net asset value of $1 per share while allocating capital into securities that are exempt from federal personal income taxes. The low-risk fund has $19 billion in total assets that are spread across 986 holdings. Securities in the fund have an average maturity of 13 days.
Returns haven’t been the highest, at 1% year to date as of May 7, but like any money market fund, VMSXX offers more stability during economic slowdowns. For some investors, that provides some peace of mind in today’s unpredictable market.
More from U.S. News
The 7 Best Vanguard Funds for Retirement
7 Best Vanguard Bond Funds to Buy
7 Best Vanguard Funds for Beginner Investors
5 Best Vanguard Money Market Funds originally appeared on usnews.com
Update 05/08/25: This story was previously published at an earlier date and has been updated with new information.
