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Where to put your cash now?

- Alan Lavine and Gail Liberman

The Vanguard Prime Money Market Fund often is touted as a great place to put large amounts of cash.

As of Sept. 21, it had an attractive yield of 5.09 percent. That compared with a national seven-day yield of 4.68 percent on retail money market mutual funds, according to iMoneyNet.com, Westborough, Mass.

Launched in 1975, the Vanguard Prime money fund has a low annual expense ratio: .24 percent of assets. It's liquid. You don't have to worry about performance or constantly moving your money around to other CDs. The fund does the investing for you.

But keep in mind that if you want the "full faith and credit" of Uncle Sam backing the investment, you won't get that from a money market fund. Plus, you can find equally high rates and check writing privileges at banks if you simply shop around. Effective Sept. 24, for example, Countrywide Bank touted a 5.50 percent annual percentage yield with a $10,000 minimum balance. Both HSBC Direct and EmigrantDirect promoted 5.05 percent online.

So which option is better: Money Market Mutual Funds or bank savings deposits?

Pros of Money Market Mutual Funds:

  • They generally pay higher yields than banks in a rising-rate environment. That's because the fund manager is constantly investing in new higher-yield short-term securities.

  • You needn't be so concerned about exceeding FDIC limits of $100,000 per depositor, $250,000 with certain retirement accounts.

  • Because money funds are required to keep most of investment maturities at 90 days or less, there's little time to lose money. They seek to keep the share price at $1, meaning you should not lose principal.

  • Money funds are highly liquid and often come with check writing privileges.

    Cons of Money Market Mutual Funds:

  • You can't rely on Uncle Sam to bail you out if a money fund goes belly-up.

  • Although many money funds long have said they'll guarantee your principal, those guarantees have been watered down over the years. Here's Vanguard Group's current claim: "Although a money market mutual fund seeks to preserve the value of your investment at $1 per share, it is possible to lose money by investing in such a fund."

  • There have been scares that a retail money market fund could "break a buck."

    In other words, investors could lose principal. So far, though, mutual fund families successfully have kicked in money so their retail investors would not lose principal at least 50 times. In addition, there were reports a few years ago that due to low earnings, certain Money Market Mutual Funds were forced to cut their annual expenses to keep investors from losing principal. If interest rates were to remain low for a long period, how long might an investment company be able to stay in business under these circumstances?

    With bank savings accounts, you have the benefit of FDIC insurance if the bank fails. On the other hand, once you lock into a great rate, a bank can change it at any time. So you constantly must keep alert. Plus, while a money market fund constantly strives for performance for shareholders, a bank's goal is to make a profit. This often means paying you lower rates whenever possible.

    FDIC insurance only covers a bank failure. Neither Money Market Mutual Funds nor bank savings accounts may have any government guarantee in the event of fraud. In that case, some institutions may be more responsive than others. So whichever type of investment you choose, it pays to examine this issue.


    Spouses Gail Liberman and Alan Lavine are syndicated columnists. You can purchase Alan Lavine & Gail Liberman's latest book Quick Steps to Financial Stability (QUE Publishing 2006) online at www.moneycouple.com or at your local bookstore. E-mail them at MWliblav@aol.com.

    To read more columns, please visit the column archive.

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