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MONEY MARKET MUTUAL FUNDS

Published by sam - 24/09/07 - 04:09:47 am

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If your banking needs include a liquid savings account that offers a relatively high yield and limited check writing privileges, a money market mutual fund may be a very attractive alternative to the savings or money market accounts offered by banks.  Money market mutual funds are in many respects similar to bank sponsored money market accounts.  Indeed, the latter were established to stem the outflow of funds.  Although money market funds are not protected by federal insurance, most experts regards them as a safe investment, and they almost always offer lower fees and higher interest rate than the bank money market accounts.  In winter 1989, for example, the average bank money market account was paying 6.33 percent interest (before fees and minimum balance requirements).  At the same time, money market funds were paying a much higher interest average yield, even after management fees, of 8.76 percent.
 
Money market funds are operated by private investment companies that use their depositor’s money to invest in a variety of short term (usually under 30 days) high denomination debt obligations, the funds pay their depositors the interest thus generated, after deducting small amount (usually less than 1 percent per annum of the fund’s asset value) for administrative expenses and profit.

You invest in a money market fund by buying shares at the fixed price of $1 each.  (There is no load or other charge when you buy or sell shares, as there is with some other types of mutual funds.)  Once the fund has acknowledge has acknowledge your deposit and your check has cleared your balance is liquid and can be withdrawn by telephone, letter, or checks that the funds provides.  Additional deposits can be made by check, by bank wire, or by authorization of systematic withdrawal from your local bank account.  Deposits made by check are usually frozen for a week to 15 days to allow your check to clear, but they earn interest during this period.

Although most funds require a minimum initial investment of $500 to $2,000 and minimum subsequent investments of $100 or more, there is wide variation in these requirements.  Checking privileges also vary from one fund to another.  In general, free checks are provided and there is no limit to the number you can write, but there is a minimum amount, ranging from $250 to $500, for which each check can be written.

These minimum on check writing and deposits prevent you from using a money market fund as your sole checking account, because you will almost certainly have occasion to write and checks, make cash withdrawals, and make small deposits.  But you may want to use your money market fund as your major depository for funds that you want to keep liquid, maintaining a minimum cost local checking account for small transactions.  For example, you can arrange to have your salary, pensions, and large investment-income checks deposited directly into your money market fund account and then write money market fund checks to pay large bills.  Your money market fund balance continues to earn interest until the day each check actually clears.

Because their balances are entirely liquid, it is possible to use a money market fund as temporary parking place for money that is between investments—for example, the proceeds of a stock sale or the sale of a home pending a further investment in stock or the purchase of another home, or a windfall that you plan to invest as soon as market conditions become more favorable.

Unlike the fixed rate on a certificate of deposit, the interest rate on money market accounts can change daily, reflecting changes the fund’s portfolio of debt instruments, which, in turn, reflect general rates.  Indeed, over the years, money market funds have paid as high as 19 percent and as low as 4.5 percent as the prime interest rate has fluctuated.  Although there is no way of locking in a high rate with a money market fund investment, there is no way of getting locked into a low one — two occurrence equally possible with certificate of deposit.   And money market funds consistently pay a higher rate of interest than bank money market accounts.

Interest on your account is calculated daily and posted monthly.  Money market fund accounts earn the maximum on all balances, no matter how low.  Most depositors instruct the fund to reinvest dividends—by buying additional shares at the $1 price—but if your balance is large enough, you can instruct the fund to mail a monthly interest check to you or to your local bank.  You will receive a written acknowledgement for each transaction and a monthly or quarterly statement of your account.  In addition, most money market funds have toll-free telephone number through which you can find out the current rate as well as the status of your balance.

Not all money market funds make the same types of investments or provide the same kinds of services.  Some issue credit cards.  Some belong to a family of mutual funds and permit depositors to make telephone exchanges between funds within the family.  Some invest only in government securities; others invest in tax-exempt bonds.

Because of differences in their investments portfolios, not all funds produce the same yields.  Although the yield of any fund will fluctuate from one week to the next, some funds perform consistently better than others.  You can compare the performances of money market funds by consulting Donoghue’s Money Fund Report or the weekly performance date published in major newspapers.  A listing of money market funds, including toll-free numbers, is available free of charge from the investment company institute, 1600 M street NW, Washington, DC 20036.  Using these telephone numbers in conjunction with the Donoghue’s performance data, you can get information and prospectuses that will help you choose the funds best suited your own needs.

Despite the obvious advantages of money market funds, many consumers hesitate to invest in them for two reasons.  First, they are concerned about safety, pointing out those deposits in bank money market accounts are federally insured, whereas deposits in money market funds are not.  Second, they prefer the convenience of a local institution and hesitate to invest through a company that may be 2,000 miles away.

Concern about safety is largely groundless, because money market funds invest in widely diversified debt obligations of only the most stable corporations and banks or federal government obligations.  Since these obligations are short term, any signs of insolvency on the part of a specific corporation or bank are likely to become apparent in enough time to warn the fund against further investment.  No money fund has ever failed, and only one has paid its depositors slightly less than they invested.  On the other hand, in recent years of banks and S & L’s have failed annually.

The remoteness of a money market fund is also not a serious drawback, since u can use your money market fund checks at any time and place and for any purpose, and also since deposits can be made by bank wire instead of by mail if necessary.  In fact, consumers who insist on depositing their money locally often fail to realize that the bank interest rates regionally and that they may be penalizing themselves if they live in an area in which interest rates are electronically low.

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