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Consider a fund like this one: Fidelity® Government Cash Reserves(FDRXX)

It says it has as of Sep 2016 - 0.05% as 1 year annual return However - the expense ratio is 0.37%.

Does that mean that I am losing money owning this fund? It does not looks so from my statements. It went up in 2016 by $0.92

What am I missing? Did the fund make truly 0.42% and only tells me the after expense yield? What if the fund makes no profit to even cover the expense ratio? Will it go negative or just give up paying their manager?

  • Where are you getting the info? In some cases return will be reported after fees, as you suggest. – BrenBarn Sep 30 '16 at 5:06
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The fund should be reporting returns net of expenses, so your interpretation is right; it made something like 0.42% (which sounds plausible, based on current yields on short-term securities), and the 0.05% is what's left after expenses. I've never seen a regular mutual fund report raw returns before expenses. If one does, the my personal opinion would be that they're trying to snooker you, as that number isn't actually representative of anybody's actual returns.

If you look carefully, you should be able to find a table that reports several kinds of adjusted returns for the fund:

  • Returns before taxes (but after expenses). Loosely speaking, this is the return you would have gotten if you held the fund in a tax-sheltered account like an IRA.
  • Returns after taxes on distributions. Any interest or dividends paid out by the fund will have taxes due. This figure should tell you how your account balance would have grown over time, if you held the fund in a taxable account.
  • Returns after taxes on sale of shares. When you sell your shares in the fund, you will owe taxes on the amount by which the shares have appreciated since you bought them. Therefore, this figure represents what you would have actually realized had you bought and held the shares for the specified amount of time (typically 1, 3, 5, or 10 years). A money market mutual fund probably won't report this number because they manage their distributions to keep their share value at exactly $1.

As to what happens if a fund can't earn enough returns to cover its expenses, in that case the value of the fund shares will decrease. This happens from time to time with riskier funds. It shouldn't happen with a money market fund because both the returns and the expenses are fairly predictable, so the fund managers should be able to avoid it, unless they get caught up in a major crisis like the 2008 banking crisis. In ordinary times, a money market fund managers who couldn't keep expenses below income would find themselves looking for a new job fairly quickly.

Finally, for what it's worth, 0.37% is a really high expense ratio for a money market fund. If you were to shop around, you could easily find comparable funds with expenses less than half that.

  • I am waking up to managing my money better. I want a no transaction fee fund within Fidelity. Which one you would recommend? (I looked at FRSXX). I probably can't go into institutional class. Also, I have no idea what 'Prime' means.... – user12363 Oct 1 '16 at 1:16
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The fund will take a small percentage of its assets to cover the expenses. Reported returns come after the expense ratio has been factored into things.

Money market mutual funds can have a zero yield in some cases though breaking the buck can happen in some cases as noted on Wikipedia:

The first money market mutual fund to break the buck was First Multifund for Daily Income (FMDI) in 1978, liquidating and restating NAV at 94 cents per share. An argument has been made that FMDI was not technically a money market fund as at the time of liquidation the average maturity of securities in its portfolio exceeded two years.[7] However, prospective investors were informed that FMDI would invest "solely in Short-Term (30-90 days) MONEY MARKET obligations." Furthermore, the rule, which restricts the maturities which money market funds are permitted to invest in, Rule 2-a7 of the Investment Company Act of 1940, was not promulgated until 1983. Prior to the adoption of this rule, a mutual fund had to do little other than present itself as a money market fund, which FMDI did. Seeking higher yield, FMDI had purchased increasingly longer maturity securities and rising interest rates negatively impacted the value of its portfolio. In order to meet increasing redemptions the fund was forced to sell a certificate of deposit at a 3% loss, triggering a restatement of its NAV and the first instance of a money market fund "breaking the buck".

The Community Bankers US Government Fund broke the buck in 1994, paying investors 96 cents per share. This was only the second failure in the then 23-year history of money funds and there were no further failures for 14 years. The fund had invested a large percentage of its assets into adjustable rate securities. As interest rates increased, these floating rate securities lost value. This fund was an institutional money fund, not a retail money fund, thus individuals were not directly affected.

No further failures occurred until September 2008, a month that saw tumultuous events for money funds. However, as noted above, other failures were only averted by infusions of capital from the fund sponsors.

Thus consider how likely is Fidelity Investments prepared to have people question how safe is their money with them which is why fund sponsors rarely break the buck.

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It means someone's getting paid too much. I'd check the sharpe ratio and compare that to similar funds along with their expense ratio. So in some scenarios it's not necessarily a bad thing but being informed is the important thing

  • You do realize the fund mentioned is a Money Market Mutual Fund, right? – JB King Sep 30 '16 at 4:10
  • Holy smokes I didn't see that. Abandon ship my friend! – Allen Mattson Sep 30 '16 at 4:12

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