Cash management strategies: understand your choices to avoid costly mistakes.

• Author: Wells, Doug
• Position: Money Talk

Many people and corporations want guaranteed access to funds with little or no notice--cash on hand. But an ongoing challenge is investing funds that are set aside as cash. Interest rates are dismally low, and many people are seeking safe ways to achieve higher yields.

"Safe" is the operative word; and as you move away from short-term government securities, the risks associated with such investments increase--sometimes substantially.

Wall Street offers an abundance of investment products that look almost as safe as the money market deposit accounts offered at the local bank. However, "almost as safe" is very different than "as safe as" cash.

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A Spectrum of Choices

Few people know that they can purchase U.S. Treasury securities directly from the United States government at www. TreasuryDirect.gov. Unlike bank accounts and FDIC insurance, there is no limit to the amount of capital that is insured; all invested funds are backed by the full faith of the U.S. government.

Moving a bit up the risk spectrum are money market deposit accounts (MMDAs) offered by the local bank. These are traditional cash accounts and, within limits, are backed by the FDIC. Investors should know that, above FDIC limits, they become general creditors of the issuing bank. Funds above the FDIC limit are subject to potential losses.

Next on the risk spectrum are money market mutual funds (MMMFs). It is imperative to understand that money market mutual funds are not backed by the U.S. government. They are essentially mutual funds that invest in traditionally low-risk investments such as traditionally investments government securities, bank CDs and commercial paper.

Within limits, MMMF rules permit the fund to keep the net asset value (NAV) at $ 1. A money market is said to "break the buck" when its NAV drops below $1. In their 40-year history, only two funds have ultimately broken the dollar. One lost 3 cents in 1994, the other lost 4 cents in 2008.

Ultra-short bond funds are a bit further up the risk spectrum. These funds invest in a wide range of securities, including corporate debt, government securities, mortgage-backed securities and other asset-backed securities. Rates on these funds vary depending on the risks of the fund. The price of the fund will not likely fluctuate much if interest rates rise, as their holdings are...