As some investors turn to banks for better returns than on money market funds, some mutual fund companies are trying to outdo them with enhanced-cash money funds, The Wall Street Journal reports. These funds invest in longer-term, lower credit instruments, whereas traditional money market funds invest in short-term Treasuries and commercial paper.
Enhanced-cash funds offer returns of as much as 1% higher than regular money market funds, which currently sport a yield of 3.38%. To further entice investors, some also offer check-cashing services and lower fees than on money market funds. The Reserve Funds just launched an enhanced-cash fund, the Reserve Yield Plus Fund, with a mere two-basis-point fee. It is currently delivering a yield of 4.32%.
The number of available enhanced-cash funds in the U.S. rose to 338 from 100 a year ago. According to Standard & Poor's the assets reached $55.7 billion, a 35% increase from a year ago. But a big chunk of the money flowed into the industry when short-term rates were lower, potentially illustrating that the lower short-term rates spark more investor interest in the enhanced-cash funds.
However, with interest rates continuing to rise, some analysts believe enhanced-cash funds may begin to lose their appeal.