# Help to understand money market fund total return

Take Schwab money market fund as an example - On the page of SWVXX, the following information is listed -

1. yields: 7-day yield (without waivers) - 1.44%
2. net expense ratio: 0.34%
3. returns (annualized): 2.13% (1-yr); 1.52% (3-yr); 0.96% (5-yr); 2.52% (inception-1992)

Q1. if my income tax bracket is 28%, is my 7-day "return" equal to [1.44-0.34 (ER) - 0.28 (tax)]% = 0.82% ?

Q2. how would a 1.44% 7-day yield result in 2.13% return in a year ?

Q3. how would the return vary from year to year if the NAV is kept at 1 ?

Q4. Is the total return equal to (return - ER - tax) ?

• Probably the last seven days include the annual dividend. In other words, they are by far the biggest seven days of the year - the rest of the year has yield 0. Dec 30 '19 at 5:57

Q1: A seven day yield isn't what it sounds like. Put simply: A seven day yield is a projection of expected behavior based upon the historical data from the previous seven days. It is a guesstimate for the coming year; it is not the amount that you can expect to receive back into your account over the course of 7 days.

As for your equation, you have a few errors in how you are looking at concepts. I don't mean for this to be condescending (this forum is all about learning something new), so I apologize in advance if I come across that way.

Let's assume that you invested \$100 into the account on January 1st, just to make the math easier, and that all of the deductions and additions occur at the same time, on December 31st. Obviously this is a gross over-simplification of how it actually works, but it should help to convey the concepts.

Over the course of a year, we'll assume that your 7 day yield prediction was accurate; you earned 1.44%, or \$1.44 on the account over a year. Your expense ratio is now deducted. However, it isn't deducted out of your earnings! It's deducted from the overall amount of money that you have in the account. So that's 0.34% of \$100, or \$0.34 that the fund takes from you.

It seems like you already have a grasp of how realized gains work for income tax, but for the sake of completeness, I feel like I should address it: Income tax will only apply to realized gains. That means that Uncle Sam won't charge you tax on anything except for the difference between what you put in and what you took out; You only owe taxes on the \$1.44 that you earned from your account. \$1.44 * 0.28 = \$0.403. Overall, you lose about seventy-four cents per hundred dollars to taxes and fees, gaining about the same over the course of a year. Not horrible, not great. But then, you don't put money into a money market account if you want it to grow quickly or exponentially; you put it there because you want your emergency fund to do something for you while still being relatively safe.

Q2: See Q1 about the correct definition of a seven day yield.

Q3) The goal of a money market fund should be to keep the NAV at or very close to 1. To reiterate-- your money market fund is not for long term growth. It's a reasonably stable place to keep a few month's salary for your emergency fund, and it's good for low-interest, stable growth that will probably be only a little bit better than your savings account's interest rate. If your money market account is aiming for an NAV greater than 1, then you're either dealing with an incompetent investment firm or mistaking a non-money-market account for a money market account.

Q4) No. The total return is equal to return - (amount invested * ER) - return*tax

(see the answer to Q1 for the full breakdown)

Additional advice (feel free to disregard it if you already have the knowledge, or to call me out if you think I've made an error-- I'm human!): Depending on your income tax bracket, you may want to look into tax free money market funds. You should also check out what other money market funds are offering in terms of expense ratios before you settle on your choice of money market fund. Keep in mind that none of them are trying to beat the market-- they're all just trying to match it. As such, variances in performance will be relatively small. However, you will see large differences in your expense ratios, which can certainly compute to large amounts of money over the course of a few decades. Generally speaking, if you're willing to dump more money in initially, you'll pay a lower expense ratio.

You should also double-check for potential conditions, such as "you must invest X amount initially, and Y amount every subsequent month." In researching this, I found some JP Morgan accounts that require a \$1000 initial investment and \$50 each month subsequently. Most money market funds will put limits on how much money you may withdraw at any given moment, or how many withdrawals you should make per month; check your expenses, and make sure that you know how much you will withdraw in a given month if you have an emergency and need to dip into that fund.

• Sure the expense ratio is deducted from earnings. It isn't a percentage of earnings (which would be computed by multiplying by earnings) but the question didn't make that mistake. You're right that that calculation IS appropriate for figuring taxes. Dec 30 '19 at 22:33
• Your final paragraph is also confused. It's not "you must invest Y amount every subsequent month", it is "if you are making periodic contributions, they are allowed to each be only Y (instead of a minimum of X)" Dec 30 '19 at 22:35
• @BenVoigt Are you saying that technically I should have taken the ER out of \$101.44? You're correct in that, I just wanted to retain easy math. I stated that it was a gross over-simplification. I just wanted to clarify that the ER was taken out of the overall amount, not just out of the profits (and that you would never receive a rebate if your account under-performed). Dec 31 '19 at 12:36