Mutual Funds/Managed Investing: Funds May Get the Jitters As Banks Offer Rival Rates
Mutual funds may feel the pressure again from a major rival: deposit accounts at some big commercial banks.</br></br>Although it's too soon to call, the funds may have reason to be jittery. Much of their growth in the past two years of declining interest rates has come from investors shopping for higher-yielding alternatives to maturing bank certificates of deposit. What's more, diversification-minded banks have shown more interest lately in the securities and individual-investment business.</br></br>The recent rise in interest rates spurred many New York City banks to start paying premium rates on certain CD accounts. In some cases CD rates have risen 1 1/2 percentage points above the dormant level of the past two years. Investors willing to tie up their dollars for a year and include some other assets in a so-called "relationship" account can now earn 7.3% on a bank CD. In comparison, the average taxable money market fund yields 5.91%, still ahead of comparable bank money-market accounts.</br></br>"If a bank wants to go out and buy deposits, they can," says Gerald Cole, head of money market funds at Kemper Financial Services, Chicago. Unlike banks, money market mutual funds can't pay out more than what the instruments in their money market portfolios earn.</br></br>Kemper, which oversees about $12.5 billion in money market fund assets, hasn't been affected by the banks' bid, says Mr. Cole. He and others note that investors have developed unique needs for their money market mutual funds. These include ready access through check writing and a sort of "safe haven" to park proceeds from their other mutual funds in nervous markets.