Some investment advisors already believe that cash is an active investment decision. This week, it may become even more active.

On Friday, a set of sweeping U.S. Securities and Exchange Commission reforms on prime money market mutual funds will take effect, making them less attractive as an analogue for cash holdings within a portfolio.

The most important changes will require institutional prime money market funds to move from a fixed $1 per share net asset value (NAV) to a floating NAV and adopt rules to manage liquidity out of the fund. Retail prime money market funds will retain their stable NAV.

“Previously, these funds were able to use amortized costs to price their securities, which allowed them to maintain a $1 per share NAV,” says Brandon Swensen, vice president and head of U.S. fixed income at Toronto-based RBC Global Asset Management. “Now, the NAV is going to depend on the price that you strike at the end of the day for your fund. That’s not even the biggest issue, though.”

Both institutional and retail prime money market fund managers will have to establish liquidity fees and redemption gates that will penalize any investor for attempting to sell shares of a money market fund under certain conditions, or make investors unable to redeem shares at all at other times.

If a prime money market fund’s daily liquidity falls below a certain threshold, it’s board of directors has to be informed by the fund managers, who then have to establish either a liquidity fee or a redemption gate to limit flows out of the fund.

“A money market fund shareholder expecting daily liquidity with their cash may end up with an unpleasant surprise,” Swensen says. “If the fund runs into trouble, they could lose access to their cash for a time, or they could be assessed a fee — if they happen to be trying to purchase securities, it could delay or prohibit the settlement of their trades.”

U.S. Treasury and other federal government money market funds will retain both their stable NAV and be exempt from liquidity fees and redemption gates.

In anticipation of the changes, many companies are launching government alternatives to their prime money market funds, including RBC.

“We closed our prime money market fund earlier this year, but we’re still managing our government money market fund,” says Swensen. “We think government funds are the future of money market funds.”

In recent days and weeks, several other companies have closed or shifted institutional funds from prime money market funds to government money market funds, including Columbia Threadneedle, Nationwide, PIMCO, and Oppenheimer.

The rules were adopted to mitigate the risk of a run on money market funds after several became distressed during the 2008 financial crisis.

“At the height of the financial crisis, the Reserve Primary Fund ‘broke the buck,’” says Swensen. “The regulations are designed to prevent that from happening again, they want to unanchor people from expecting that they’ll be able to take a dollar out for every dollar they put into a money market fund.”

“Breaking the buck” means that the fund was unable to round up to achieve its $1 per share NAV.

According to Bloomberg, almost $700 billion in assets has already moved from prime money market funds to government funds, and around $400 billion of that occurred in August and September. $100 billion moved out of prime money market funds during the week of Sept. 26 alone, according to Reuters.

Before the financial crisis, money market funds weren’t just a place to park cash. They would also produce a low but dependable yield. Now, however, such funds yield close to zero.

“Previously, these prime funds were able to offer higher yields because they took a small amount of credit risk, so investors got a free lunch of a bit of yield without taking the credit risk because of the stable NAV,” Swensen says. “Now, the yields are very small, and investors will be exposed to the volatility within prime funds. There is no free lunch there anymore.”

In fact, internet savings accounts now often yield 1 percent or more annually — more than money market funds.

That means that investors who still use prime funds will not only see little to no return on their investment over the short to intermediate terms, but may lose money if they must pay liquidity fees to sell their positions.

“Investors are generally okay with taking the additional credit risk,” Swensen says. “We have a philosophical difference with imposing liquidity fees and redemption gates on investors. We think prime funds are now problematic as products, whereas before these rules and before the financial crisis they functioned pretty well for over 20 years. We don’t think that investors should have to work so hard to monitor their cash holdings.”

Not only that, but prime funds can no longer be used as “sweep” accounts that accept regular deposits from investors, or as settlement accounts to handle to proceeds and expenses of trading.

Thus, prime money market funds are no longer a good analogue for a cash position, says Swenson, adding that advisors should use government funds instead.

Yet government money market funds typically have lower yields than their institutional and retail prime cousins, which is why investors may also want to consider buying ultra-short term bonds with a portion of what would normally be their “cash” position.

“We also look for short- and ultra-short duration products that will yield between 1 and 1.8 percent,” says Swensen. “That gives people a chance to gain a little return from the risk they’re taking, and there’s additional income with little additional risk to be found on the yield curve if you move just beyond the money market fund space.

“Ultimately, a product that was around for 20 years is gone on Oct. 14. The prime fund as we knew it is dead. Government money market funds and ultra short bonds are the future of your cash allocations.”