As an investor, I often seek stable, low-risk options to park my cash while maintaining liquidity. Money market mutual funds (MMMFs) fit this need, and American Century Investments offers a range of such funds. In this article, I explore American Century’s money market funds, their mechanics, benefits, risks, and how they compare to alternatives like bank savings accounts and Treasury bills.
Table of Contents
What Are Money Market Mutual Funds?
Money market mutual funds invest in short-term, high-quality debt securities like Treasury bills, commercial paper, and certificates of deposit (CDs). They aim to preserve capital while providing modest returns. Unlike bank accounts, MMMFs are not FDIC-insured, but they are regulated under the Securities and Exchange Commission’s (SEC) Rule 2a-7, which imposes strict credit quality, maturity, and diversification requirements.
American Century offers several MMMFs, including:
- American Century Capital Preservation Fund (CPFXX)
- American Century Government Money Market Fund (BGNXX)
These funds differ in their underlying assets, yields, and risk profiles.
How American Century Money Market Funds Work
Money market funds maintain a stable net asset value (NAV) of $1 per share, making them attractive for investors seeking minimal volatility. The returns come from interest income, which is distributed as dividends.
The yield is typically expressed as the 7-day SEC yield, an annualized measure reflecting the fund’s earnings over the past week. For example, if CPFXX has a 7-day SEC yield of 3.5%, an investment of $10,000 would generate roughly:
\text{Annual Interest} = \$10,000 \times 0.035 = \$350However, yields fluctuate with interest rate changes.
Key Features of American Century MMMFs
| Feature | American Century CPFXX | American Century BGNXX |
|---|---|---|
| Primary Holdings | Commercial Paper, CDs | U.S. Government Securities |
| Expense Ratio | 0.40% | 0.35% |
| Minimum Investment | $1,000 | $1,000 |
| Liquidity | Daily redemptions | Daily redemptions |
| Risk Level | Low (but not FDIC-insured) | Very Low (mostly government-backed) |
Comparing American Century MMMFs to Alternatives
1. Bank Savings Accounts
- Pros: FDIC-insured, no market risk.
- Cons: Lower yields (often below 1%).
2. Treasury Bills (T-Bills)
- Pros: Backed by the U.S. government, tax advantages.
- Cons: Less liquid (maturities from 4 weeks to 1 year).
3. Other Money Market Funds (e.g., Vanguard, Fidelity)
- Pros: Often lower expense ratios.
- Cons: Slightly different risk exposures.
Risks to Consider
While MMMFs are low-risk, they are not risk-free. The 2008 financial crisis saw the Reserve Primary Fund “break the buck” (NAV fell below $1), causing panic. Since then, reforms like floating NAVs for institutional funds have reduced such risks, but retail funds like American Century’s still face:
- Interest Rate Risk: Rising rates can pressure fund yields.
- Credit Risk: If issuers of commercial paper default.
- Liquidity Risk: In extreme market conditions, redemptions may be restricted.
Tax Considerations
American Century’s government money market fund (BGNXX) invests in U.S. Treasury securities, making its dividends exempt from state and local taxes. The capital preservation fund (CPFXX) does not have this benefit.
For a high-income investor in California (marginal tax rate: 37% federal + 13.3% state), the after-tax yield comparison might look like this:
\text{After-Tax Yield} = \text{SEC Yield} \times (1 - \text{Federal Tax Rate} - \text{State Tax Rate})If BGNXX yields 3.5%:
\text{After-Tax Yield} = 0.035 \times (1 - 0.37) = 2.205\% \text{ (no state tax)}If CPFXX yields 3.8%:
\text{After-Tax Yield} = 0.038 \times (1 - 0.37 - 0.133) = 0.038 \times 0.497 = 1.888\%Here, BGNXX provides a better after-tax return despite a lower nominal yield.
Who Should Invest in American Century MMMFs?
These funds suit:
- Conservative investors seeking stability.
- Cash management strategies for short-term goals.
- Portfolio diversification to balance riskier assets.
However, if you need FDIC insurance or higher yields (via T-bills or high-yield savings), alternatives may be better.
Final Thoughts
American Century’s money market funds offer a balance of safety, liquidity, and modest returns. While not the highest-yielding option, they serve as a reliable cash management tool. I recommend assessing your tax situation, risk tolerance, and liquidity needs before investing.
