Higher Yields With Little Risk

April 15, 1985|By Kenneth Michael of The Sentinel Staff

Money market mutual funds have grown into one of the most popular forms of investments since gaining the general public's attention in the mid-1970s.

The nation's 343 money funds now have combined assets of a little more than $200 billion.

The funds are merely a pooling of smaller amounts of money into sums large enough to buy short-term securities in denominations of $100,000 or more, which carry higher interest yields than those available to the average investor.

Because the money funds are designed to provide high yields while maintaining a high degree of safety, they invest in a variety of short-term U.S. government-backed securities, certificates of deposit and corporate debt instruments.

No investor in a modern money fund has ever lost money or failed to receive payment of a dividend, according to the Consumer Financial News Service.

Because the pooled money is invested in short-term securities, the dividend yields change daily and are credited to an account every 24 hours, thus providing a compounding effect. In most funds, investors can withdraw some or all their money within a few hours.

The activities and investments of the money funds are strictly regulated by the Securities and Exchange Commission and state agencies. The SEC requires that money funds invest in securities that mature in no more than one year or maintain a portfolio that averages 120 days or less.

William Donoghue, publisher of Donoghue's Money Fund Report, said maturities normally average between 30 and 45 days and seldom go beyond 60 days.

The funds reached their heyday in 1981 and 1982, when the prime interest rate was at record levels. Then money was pouring out of banks and thrift institutions into the money funds, whose combined assets hit a peak of $232.6 billion on Dec. 1, 1982.

After putting pressure on Congress to allow them to compete, banks and thrifts began offering money market deposit accounts Dec. 14, 1982. The assets of the money funds plunged within the next few weeks.

Yields of money funds tend to remain higher than those of the bank and conversely, they lag in periods of rising interest rates.

Most money funds require a minimum initial investment of $1,000, although there are some that have $1 minimums and others that are as high as $20,000. Additional investments usually are limited to not less than $100.

Almost all of the funds offer investors check-writing services. Some have set minimums for the check amount.

Investment in the funds can be made through almost any stock brokerage firm or by dealing through the mail.

The three basic forms of money market funds:

-- Government-only funds, which buy only securities backed by the U.S. Treasury.

-- Broad-based funds, which buy high-rated corporate securities and other money market instruments as well as Treasury instruments. These slightly more risky funds generally have higher yields than the government-only funds.

-- Tax-free funds, which buy high-rated securities issued by municipal and state governments. These funds have relatively low yields, but are attractive to high-income investors because the dividends are exempt from federal income tax, although they are subject to the intangible tax in Florida.

Norman Fosback, editor of Fort Lauderdale-based Money Fund Safety Ratings, said not one of the funds can be considered as taking ''excessive risks.'' His ratings are based primarily on yield comparisons, he said.

Fosback termed the Capital Preservation II Fund the most conservative. It buys only government securities that mature in one week or less, thus reflecting swings in the general money market more quickly than the others.

The Kemper Money Market Fund and the Vanguard Money Market Trust Prime have the best records for consistently high yields, according to Fosback.

Among the tax-exempt funds, he rated the Calvert Tax-Free Reserves Money Market as the best performer.

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