Transcripts

"Of Mutual Interest"-John Waggoner, Mutual Fund Columnist at "U.S.A. Today"

SUSIE GHARIB: Our "Of Mutual Interest" commentator says when it comes to building an income portfolio, there's a lot to be said for good old fashioned money market funds. He's John Waggoner, mutual fund columnist at "U.S.A. Today."

JOHN WAGGONER, MUTUAL FUND COLUMNIST, USA TODAY: Finding a mutual fund that delivers high monthly income is about as hard as finding a flying reindeer. For the moment, the best present for an income portfolio is a plain old money market fund. There's two problems with getting income from a mutual fund. The first is the fact that it's hard getting much income from anything these days. The Federal Reserve has pushed its key Fed funds rate down to 4.2 percent from 5.25 percent in the summer. That's not much.

The other problem is expenses. Funds typically take their expenses from their dividend yield. And when rates are this low, expenses really slash your yield. If your fund earns 5 percent a year and takes 1 percent in expenses, for example, it has taken 20 percent of your income. Ideally, you should get a higher yield from a bond fund than from a money fund because bond funds have more risk than money funds do. But precious few bond funds yield more than money funds these days. So if you're looking for income, remember this figure: 4.2 percent. That's how much the average money fund yields. If you're going to invest in a bond fund now, you should get a higher yield than 4.2 percent.

A few low-cost funds that invest in government bonds do yield a bit more than 5 percent. And many high-yield, high-risk bond funds offer higher yields than money funds. But they are far riskier than other bond funds and should be used sparingly. Waiting for better yields is a bit like waiting for the time to open presents; it seems to take forever. But until bond funds offer better yields, the best fund for the present is a money market fund. I'm John Waggoner.