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Jewish World Review July 30, 1999 /17 Av 5759

Dian Vujovich

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Fed has increased the Federal Funds rate in market funds -- MONEY MARKET MUTUAL FUNDS have always been popular parking places for investors' cash. That's because they are convenient, have higher yields than those offered by savings accounts, and offer speedy accessibility to your cash. But now that the Fed has increased the Federal Funds rate, you may see some higher returns quickly reflected in your fund, depending on what you own in there.

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 your money fund will respond to an interest rate change," says Frank Rachwalski, portfolio manager of the Zurich YieldWise Money Market Fund.

That means that if you're a shareholder in a money market mutual fund with securities that have an average life of, say, 30 days, you're going to see an increase in the fund's yield faster than you would if the average maturity in the portfolio were 90 days.

Rachwalski says that the Federal Funds rate is like an anchor rate -- it's the floor from which a lot of interest rates are based. "So, commercial paper rates are up about 25 basis points and CD rates are up about 25 basis points -- 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 the newsletter Money Letter, agrees. He's telling his readers to expect one more interest rate increase of one-quarter of 1 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."

Talk to any Wall Street pro about interest rates, and you may be confused as to why they move and what their impact is on funds like money market mutual funds. 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 make isolated rate changes. Rachwalski says that if the Fed changes interest rates in one direction, it is more likely to make a second rate change -- in the same direction.

If that's so, rates could be one-half of 1 percent higher by year's end.

-- 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 with investment advisers who 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 have a place in most people's portfolios, no matter what's happening in the market or to interest rates.

JWR contributor Dian Vujovich's most recent books include 101 Mutual Fund FAQs and 10-Minute Guide to the Stock Market .


©1999, NEA