With interest rates going up again, many people are considering a return to money market mutual funds. But since the last heyday of money funds a few years ago, the financial industry has come up with many products that are competitive with them, or perhaps even better, particularly in terms of safety and yield.
One of these products is taking advantage of escalating mortgage interest rates to provide investors with rather high yields - nearly 14 percent - from highly secure investments rated AAA or better.
The Alliance Mortgage Securities Income Fund, a mutual fund managed by the Alliance Capital Management Corporation of New York, began in January and has brought in some $210 million so far, says Jon S. Fossel, senior vice-president at Alliance. The fund is drawing in new money at a rate of about $1 million a day, he adds.
One of the attractions of this fund, Mr. Fossel says, is that it gives investors the opportunity to participate in the rapidly growing mortgage securities market for an initial investment of only $1,000, and $250 after that. Because mortgage securities usually trade in units of $100,000, buying a ''piece'' of these units has meant not getting full value for the money invested.
But by using futures contracts, repurchase agreements, and options, Alliance's fund has been able to maintain a high yield, while still giving the kind of quality usually reserved for tax-free investments. As of the end of May, Fossel reports, the fund was paying a 13.84 percent yield, less than half a point below the 14.29 percent average interest rate on conventional mortgages, as reported by the Federal Home Loan Mortgage Corporation (FHLMC).
The quality, Fossel says, comes from the fact that almost all the the securities in the portfolio are backed by the three major government-chartered agencies that buy loans from banks and other mortgage lenders so these institutions have more money to lend. The three agencies are the Government National Mortgage Association (''Ginnie Mae''), the Federal National Mortgage Association (''Fannie Mae''), and the FHLMC, also known as ''Freddie Mac.''
Of the three, Fossel said, only Ginnie Mae securities are considered ''Treasury quality,'' meaning they are backed by the full faith and credit of the US government. The others are backed by the agencies, which presumably could go broke, ''although Congress wouldn't let that happen,'' he says. These two, then, are considered to have an AAA rating.
''What you've got,'' Fossel said, ''is a junk-bond yield with triple-A quality.''
As might be expected with such a high-grade portfolio, Fossel says, the investors in this fund tend to be looking for safety. This includes people with individual retirement acounts (IRAs), those at or near retirement, or people who have become comfortable with money market funds but want a higher yield. Many people, for example, may have $10,000 or more in a money market fund, when they really don't need more than $2,000 to meet immediate needs. The rest, he suggests, could be put in this fund.
Because the fund is sold through brokers, there is a 5 percent sales charge, or ''load,'' but there is no withdrawal fee. Fossel says the 13.84 percent yield mentioned earlier would be higher if 100 percent of your money were being invested, so this is your actual ''after sales charge'' yield. If dividends are reinvested, the effective annual yield, based on monthly compounding, is 13.87 percent.
This rate cannot hold up forever, Fossel admits, because ''I think we're very close to the peak in mortgage rates. But we'll lock in the highest rates we can.'' Money funds work this way; when rates go down, they buy longer-term securities so the yields stay up longer.
So while rising mortgage rates will lock more people out of the housing market and raise monthly payments for those with adjustable-rate mortgages, they also offer some lucrative opportunities in the mortgage securities market.
On bigger gifts
I have heard that the limits on once-in-a-liftime tax-free gifts have been raised, but I have been unable to get any information on this. Can you clarify? - G. R.
You are probably referring to the change in gift taxes that was made in the 1981 tax law. As of 1982, when that law became effective, an individual can give up to $10,000 to any person tax-free. So two parents with two children could give a total of $40,000.
Beyond that, however, an individual can make a once-in-a-lifetime gift of several hundred thousand dollars to an individual. The limits on these gifts are in the process of a gradual increase. This year, it's $325,000; in 1985, the limit is $400,000; in 1986, it is $500,000; and in 1987, it's $600,000. The total can be used in bits and pieces or all at once and applies to both lifetime gifts and bequests. So if you have given away $100,000 over and above the $10, 000 limit for annual gifts, you will still be able to give $225,000 this year, or $500,000 in 1987.