Differences Among Money-Market Funds Produce Varying Yields and Levels of Risk
NEW YORK -- Money-market mutual funds have enjoyed a resurgence of popularity this year. Their assets may never return to the record levels reached in the fall of 1982, shortly before banks were allowed to offer competing "money market accounts." But the floundering stock market, the rise in interest rates and a rate advantage over the bank competitors have led consumers to increase their holdings of these easy-access, market-rate investments.</br></br>Investors shouldn't assume that the more than 300 money funds are all alike. The funds can differ in such things as their minimums for investment and check-writing and the ease of getting through to customer-service people on the telephone. Perhaps more important, they also vary widely in the types of short-term assets they buy. These differences produce varying yields and levels of risk.</br></br>"Money funds are looked at as a homogeneous, commodity-type product. But when you look at them closely, you see there are really big differences in risk and management policy," says Edward A. Taber III, money-fund portfolio manager at T. Rowe Price Associates in Baltimore.</br></br>Consumers haven't had to become aware of the risk differences because the money funds have an excellent safety record. No fund has ever owned a security that defaulted. Investors suffered a 6% decline in principal in one small fund several years ago, but that was because the fund had extended the maturity of its holdings to the point that many would say it wasn't even a money fund anymore. Nevertheless, there conceivably could be principal losses in a money fund, so investors should be aware of how much risk their particular fund is taking.</br></br>The most common type of money fund is one that invests in a diversified portfolio of short-term government securities, bank certificates of deposit and corporate obligations called "commercial paper." Other funds stick to the safety of government obligations. There also are big distinctions within each category. Yields generally rise with the risk of the investments, as shown in the accompanying data from Donoghue's Money Fund Report.