MONEY MARKET FUNDS
Money market mutual funds have always been popular parking places for investors' cash. That's because they are convenient, their yields are higher than those offered by savings accounts, and accessibility to your cash is pretty speedy.
But now that the Fed has increased the Federal Funds rate, when to expect to see some higher returns reflected in your fund isn't as much a matter of which money market fund you own as it is what's owned in your fund.
Granted, a 25-basis point increase in Federal Funds rates ( that's the rate that banks charge other banks when lending money) isn't much to get excited about. But what the heck; if you've got money stashed in a money market mutual fund, any increase in returns is good news. When you'll see that increase in yield, however, depends in large part upon the maturity dates of the securities held in a fund's portfolio.
"The shorter the average maturity, the faster you money fund will respond to an interest rate change, " says Frank Rachwalski, portfolio manager of the Zurich YieldWise Money Market Fund ( 1-800-537-6001).
That means that if you're the shareholder in a money market mutual fund in which the securities in it's portfolio had an average life of say 30 days, you're going to see an increase in the fund's yield quicker than you would if the average maturity in a fund's portfolio were 90 days.
Rachwalski said that the Federal Funds rate is like an anchor rate---it's the floor from which a lot of interest rates key off of. "So commercial paper rates are up about 25 basis points, cd rates are up about 25 basis points and overall, money market rates are going to rise about that amount also."
Rachwalski also thinks that rates could increase again this year. And by about the same amount.
Walter Frank, chief investment officer of a newsletter titled MONEY LETTER, agrees. He's telling his readers to expect one more interest rate increase of one-quarter of one percent within the next three to four months. The reason, he writes: "Although the economy is slowing somewhat, it is not slowing rapidly enough to prevent a further increase."
Talking to any Wall Street pro about interest rates, the reasons they move and the impact that has on funds like money market mutual funds can be confusing. So, to help clear the dust, here are a few things to remember about money market funds and interest rate changes:
- The Federal Reserve System doesn't typically do isolated rate changes. Rachwalski says if the Fed make a change in interest rates in one direction, that they are more likely to change twice---in the same direction.
If that's so, rates could be up by one-half of one percent higher by year-end than they were at the beginning of 1999.
- Money market mutual funds are investments, not bank accounts. Read any money market mutual fund prospectus and you'll see that investors are called "shareholders". Also, shares of money market mutual funds can be purchased at the price of $1 per share and redeemed at the per share price of $1.
While it's the intent of fund companies to keep their money market mutual funds shares trading at a constant $1 per share, that stable price comes with no guarantees. Consequently, it makes good sense to invest in money market mutual funds whose investment advisors are credit-worthy and have the capital to support their funds.
- And finally, there's strength in money market funds. "In a period of rising interest rates, money market mutual funds are the best performing fixed income asset class, " says A Michael Lipper, chairman of Lipper Inc.
So even though money market mutual funds don't have the sex-appeal of say tech funds, don't overlook them. They've a place in most people's portfolios no matter what's happening in the market or to interest rates.
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