Firms Offer Enhanced-Cash Funds to Compete with Banks

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.