Money market funds seek risk insurance

Many savers like to have the Federal Deposit Insurance Corporation holding their hand, and the money market mutual funds know it. They are considering creating their own private insurance facility to match the attraction of the new insured money market accounts at commercial banks and thrift institutions.

The coverage involved would be massive - as much as $100 billion - possibly the largest private insurance contract ever.

Separately, the Vanguard Group of Investment Companies, Valley Forge, Pa., has plans to offer a money market fund that would be insured by St. Paul Fire & Marine Insurance Company.

The Investment Company Institute (ICI), a mutual fund trade association, launched an investigation last spring into the feasibility of obtaining insurance coverage for the billions of dollars of money market shares by a syndicate of the nation's largest insurance companies.

A small committee of top money market mutual fund executives met in January in Key Largo, Fla., to consider a proposal developed by Johnson & Higgins, an insurance consulting firm. It was rejected, partly because the insurance would have been ''expensive.''

''Everything is in limbo right now,'' noted Richard Pogue, the ICI senior vice-president working on the project. But he is still working with the insurance consultants to come up with a package that is more attractive to the funds and feasible for underwriters.

What makes the project more urgent for the industry now was the creation in December and January of the two new types of money market accounts by banks and thrifts. Some $200 billion has moved into these new deposits. Most of that money has come from other accounts within the banks or thrifts, such as low-interest savings deposits. But some of that money has come from the money market mutual funds.

These funds have seen their deposits decline from $232 billion at the peak Dec. 1 to $197.4 billion in the week ended Wednesday. Not all of that money has gone into the new money market accounts.

George S. Bissell, chairman of the ICI and chief executive of Massachusetts Companies Inc., a money managing firm, maintains that much of that money left the funds to pay for Christmas gifts, taxes, or other such normal expenses.

He figures the new bank and thrift accounts will lose some of their momentum as the banks reduce both the amount of their advertising and other promotion and the introductory, enticingly high interest rates.

In fact, that has already happened. Earlier, some banks and thrifts were offering for a temporary period rates as high as 20 or 25 percent. Now rates somewhat above 10 percent are more common. That is still above the 7 or 8 percent paid by the money market funds.

Mr. Bissell hopes that if the difference in rates narrows further, as expected, the money market funds will keep their investors and perhaps even attract some of them back through the variety of investment vehicles and services a mutual fund group can offer.

For some investors, however, security is extremely important. The insurance coverage provided by the FDIC for bank accounts and by the Federal Savings and Loan Insurance Corporation for thrift accounts has kept billions of dollars in low-interest passbook accounts.

Money market fund managers consider their shareholders' money extremely secure. They point out that no money market shareholder has ever lost a dollar in the funds and that all the money is invested in short-term money market instruments, such as finance paper, large-denomination bank certificates of deposit, or Treasury bills, which are being constantly redeemed at their face value. The average maturity date of these investments is currently 37 days.

Nonetheless, there are two risks:

1. Market fluctuations. If interest rates should rise sharply and numbers of shareholders, especially institutions, redeem their shares to put their money directly into new higher-paying investments, a fund could face a liquidity crisis and have to sell some of its investments at a loss. This happened once, but the parent concern covered any losses and shareholders were not harmed.

2. Default by one of the investments. The risk here is not considered high, either, especially considering the diversified portfolio of the money market funds.

Nonetheless, the mutual funds are considering insurance to cover the second risk. For them, the problem is cost.

The Vanguard Groups' coverage for a new money market fund (a prospectus has been filed with the Securities and Exchange Commission) would insure the fund's portfolio for both risks for as much as $500 million. But it would apparently cost 38 basis points (0.38 percent) a year, which would come from the investor's pocket.

The ICI group would like to get insurance at less than half that cost. Money market funds investing only in government paper are not interested. Nor are those whose customers are primarily sophisticated institutional investors aware of the minimum risks involved. But it does interest funds with many individual investors, and these could have as much as $100 billion in assets, according to Mr. Pogue.