Skittish about stocks? Think money markets

Small investors - and quite a few big-ticket ones as well - are rediscovering the merits of money-market mutual funds.

Fund assets are up, following recent rises in short-term interest rates. Money-market mutual-fund returns, which run between 4.5 percent and 5 percent for regular general purpose accounts, now beat returns for many stock funds. Finally, concerns about possible Y2K computer disruptions at the end of the year have prompted some folks to seek out money funds as the ultimate "safe investments" for short-term deposits.

"Money funds are looking very attractive right now," says Jonathan Pond, a nationally recognized financial writer and analyst based in Boston. "Usually the argument against money-market funds is that they don't keep up with inflation after taxes. But right now they are beating inflation and taxes."

For the week ending Nov. 3, money-market mutual fund assets rose $9.4 billion, to $1.5 trillion, according to the Investment Company Institute, a trade group in Washington. The bulk of that money - $6.9 billion - went to some 803 institutional accounts.

But $2.5 billion went to some 946 retail accounts for individual investors, according to the ICI.

Money-market mutual funds invest in short-term, high-quality debt securities, such as commercial paper issued by corporations, bank certificates of deposit, and US Treasury bills. The funds are tightly regulated by the US Securities and Exchange Commission, which tends to make them especially appealing for conservative investors.

Money funds must maintain an average maturity on their securities of no more than 90 days. That protects the portfolio from sharp gyrations in interest rates. The funds also maintain a constant share price of $1. Thus, if you held 1,000 shares, your total worth would be $1,000.

Most money funds offer unlimited check-writing privileges, usually for designated amounts, such as $250 or higher, or $500 or more.

Although the US government does not back money-market mutual funds, no fund is believed to have ever gone completely belly up in the United States.

In the rare cases when a money fund runs into trouble, the fund company has made certain that investors get back their money.

Money funds come in several varieties:

*Taxable funds are what most people call "regular" or "general purpose" money funds. Gains are taxed as dividends.

*Treasury or government funds pay slightly lower interest than corporate-linked funds. But earnings are often exempt from state and local taxes.

*Tax-free funds invest in short-term securities issued by various state and local governments. They are generally exempt from federal taxes.

*Single-state money funds invest in state and local securities from one state. Gains are usually exempt from federal, state, and local taxes for state residents.

"Money-market funds allow you to earn what you can in a safe environment on a temporary basis," says George Delaney, who oversees some $9 billion in money-market fund assets for the Armada and Parkstone families of funds.

One concern is that the large mix of securities in money funds could be temporarily caught up in Y2K computer mix-ups.

But Mr. Delaney argues that scenario is highly unlikely. The Federal Reserve, he notes, is providing special liquidity to money funds just in case of year-end problems.

Moreover, the very fact that money funds deal in short-term financial instruments makes them less vulnerable to long-range problems, Delaney says.

Even so, he recommends that investors keep all paperwork on their funds as they go into the end of the year, and then double-check balances sometime after the start of the new year.

Some fund experts argue that if you have significant amounts of money in money funds, it makes sense to shift your assets from a regular account to a US Treasury or government account before the year-end.

"It's sort of an ultimate low-cost insurance policy," says Sheldon Jacobs, who publishes the No-Load Fund Investor, a newsletter in Irvington-on-Hudson, N.Y.

Keep your assets in the government fund until sometime early in the new year, Mr. Jacobs suggests, and then shift back to the regular money fund.

Top yielding money-market funds

Interest Yields Fund name Simple Compound

Strong Investors Money Fund 5.64% 5.80% 800-368-3863

Scudder Premium Money Market 5.54 5.69 800-854-8525

WT Money Market Portfolio 5.48 5.63 800-254-3948

Zurich YieldWise Money Fund 5.47 5.62 800-373-9387

Zurich YieldWise Govt. Money Fund 5.40 5.55 800-373-9387

Source: IBC Financial Data Inc. All rates compounded 7 days as of Nov. 9.

(c) Copyright 1999. The Christian Science Publishing Society