An Advantage Vanishes for Money Funds; In a turnaround from decades past, money market bank deposits are paying more interest, on average, than money market mutual funds
January 12, 2014 Leave a comment
An Advantage Vanishes for Money Funds
By ANNA BERNASEK
JAN. 11, 2014
When money market mutual funds were invented back in 1971, they offered something new. Investors could earn higher yields than on bank deposits, with nearly the same liquidity and safety. But that has changed. Currently, a money market deposit at Citibank pays about five times as much interest as an investment in the Fidelity Cash Reserves fund — though, in today’s low-rate environment, the yields are minuscule.The bank’s advantage appears to be a trend. In early 2007, money market mutual funds typically paid almost four percentage points more than bank deposit accounts, according to the Investment Company Institute, a trade association. But ever since 2009, bank money market deposit accounts have consistently paid more, on average, than their mutual fund counterparts. “The zero-interest-rate environment has been brutal on money market funds,” said Peter G. Crane, a founder of the money market fund information company Crane Data. “They have lost their yield advantage.”
The difference between 0.05 percent and 0.01 percent may not look like very much. But then again, the appeal of a money market mutual fund in the first place was that you could earn more than you could get from your bank. That helps explain a surge of outflows from money market mutual funds in 2010 and 2011.
But why do people still park nearly three-quarters of a trillion dollars in money market mutual funds when they could do better at a bank? Moreover, bank deposits are insured by the Federal Deposit Insurance Corporation for up to $250,000, while money market mutual fund accounts are not.
“People use money market accounts for various reasons,” said Sean Collins, senior director of industry and financial analysis at the I.C.I. “Savings is one reason, but transactions is another.” For people who trade or invest often, money market mutual funds may have advantages, he said, because banks often limit transactions in their money market funds to six a month. So, as usual, it pays to read the fine print. And for those looking for the highest yield, it may also pay to shop around.
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