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Archive for Friday, October 11, 1996

NO RAZZLE-DAZZLE, BUT STILL SUCCEEDING

October 11, 1996

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Money markets and mutual funds have increased more than 120 billion since last year.

Associated Press Writer

New York -- Stock investments may be hogging all the financial headlines, but money market mutual funds have set some records of their own this year.

In recent weeks the total amount in these modern versions of the old-fashioned savings account has hit record levels above $850 billion, according to a tally kept by IBC Financial Data in Ashland, Mass.

That represents an increase of some $120 billion from a year ago around this time.

The money funds' success story has continued even though the return they provide for their investors pales beside what stock funds have achieved of late.

Over the 12 months through Sept. 30, reports the research firm of Lipper Analytical Services Inc., general money market funds returned an average of 4.89 percent. That was less than a third of the 16.9 percent gain recorded by the average domestic stock fund.

``It's a lousy conversation starter at cocktail parties,'' observes Daniel Wiener in his newsletter Independent Adviser For Vanguard Investors. ``Can you imagine: `Boy, I really nailed down a nifty seven-day yield on my money market last week!'''

Nonetheless, says Wiener, ``money market funds have a place in every investor's portfolio.'' They act as a convenient, easy-to-reach storage place for an emergency cash reserve, and for whenever you want to wait awhile before deciding where else you might like to invest.

Money funds aren't covered by federal deposit insurance, the way many bank savings vehicles are. But they have a big yield edge over liquid bank money-market deposit accounts, which were returning an average of 2.64 percent at last report from Bank Rate Monitor.

Indeed, money funds even yield more than the typical six-month certificate of deposit, at 4.70 percent. CDs, unlike money-market investments, can't normally be tapped for unexpected short-term needs without paying an early-withdrawal penalty.

A money fund yielding about 5 percent has lately kept its investors on pace with inflation, even after they pay about a third of what they earn into the tax coffers of Uncle Sam and their state and local governments.

Perhaps even more important, a cushion kept in a money fund can serve as a valuable part of a diversification strategy designed to stabilize an investor's results.

The Federal Reserve has steadfastly decided against pushing interest rates higher of late. But if rates should begin to move up, with or without a nudge from the Fed, money funds may prove especially consoling to their owners.

Rising interest rates would stand to weigh down prices of bond investments, and quite likely stocks as well. But yields on money funds would start moving up.

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