Many people are perplexed about savings accounts in banks and savings and loans, yields and earnings, and security of deposits in money-market certificates of deposit (CDs) and mutual funds. Recent regulatory changes may be contributing to the confusion.
Here is a brief rundown on these investments:
First, the term, "money market," applies to certificates of deposit (CDs) and specific types of mutual funds. Money- market certificates of deposit are offered by commercial and savings banks and savings and loans (S&Ls). Money-market CDs are insured up to $100,000 along with your other deposits in member institutions.
Money-market CDs get their name from the six-month Treasury bills on which the CD interest rates are based. Each week, usually on Mondays, Treasury bills are auctioned. The new rate for money-market CDs begins on Thursday that week and extends through the following Wednesday. Although the rate changes weekly, once money is committed to a money-market CD, the rate remains constant for six months to maturity. The minimum deposit is $10,000. You invest in these money-market CDs at local banks and S&Ls. There is no fee, but you are subject to substantial penalties if you take your cash out before maturity.
Second, money-market mutual funds (MMMF) are not available from banks or savings and loans. These MMMFs operate like the hundreds of other mutual funds. They collect money from individual or corporate investors and pool resources. The MMMF invests these pools of money in a variety of money-market instruments -- large (over $100,000) certificates of deposit, bankers acceptances, commercial paper, repurchase agreements, US Treasury and agency instruments, and others.
These MMMF differ in several important ways from the money-market CDs above. Minimum initial deposits in the MMMF may be as little as $1,000. Add-on deposits may be as little as $50 or $100.Deposit minimums vary widely among the more than 75 funds now operating. Money invested in MMMF is not insured. Most MMMF charge no fees for getting into or out of their funds.There are no penalties for taking out all or part of your cash at any time, as there is no maturity and no minimum time that deposits must remain in the fund.
A big difference between money-market CDs and MMMF is the procedure for investing. With a money-market CD, you deal with a local bank or S&L. For a MMMF, you must write or call for an application and prospectus. Names of funds are available from ads in this paper or from various lists such as those available from the No-Load Mutual Fund Association, Valley Forge, Pa. 19481. To deposit in a money-market mutual fund (MMMF), you must complete the application and send it with your check or draft to the custodian bank noted on the application.
Third, yields vary daily among MMMF and future yields are unknown.Money- market CDs guarantee a specific yield through maturity. Yields on both have been in the 14-15 percent range recently, although new regulations will reduce earnings from MMMF.
One can only wonder at the apparent discrimination against small savers as seen in numerous regulatory changes by the government to limit yields from savings opportunities for people with modest amounts:
* The enormously popular money market CDs originally gained from daily compounding of interest. That was stopped in 1979 when rates climbed.
* Interest rates on savings accounts and CDs for minimum periods of 90 days up to eight years are strictly controlled by regulations at relatively low levels -- a hangover from the '30s depression.
* When yields from the 30-month CDs keyed to US Treasury notes exceeded 12 percent, regulations limited the rate to no more than 12 percent, although daily compounding was permitted to increase the effective rate.
* Recent regulations requiring money- market mutual funds to keep 15 percent of new depositor funds in reserve effectively reduces earnings because only 85 percent of the money can be used to produce income.