Down on stocks? Savings choices offer safety, possibly higher yields

If you were discouraged by the stock market last year, maybe it's time to take another look at savings accounts. More people are now willing to give up some yield, in return for the knowledge that their money is safe. Actually, yields on ordinary savings didn't look so bad last year. While the Dow Jones industrial average was gaining less than 2.5 percent in 1987 and the average equity mutual fund crept up only about 1.5 percent, you could have earned 6.5 or 7 percent on a certificate of deposit at the corner bank.

That's one of the savings alternatives that are getting more interest these days. Other beneficiaries include money market mutual funds, United States Treasury bills, Savings Bonds, and short-term government bond funds. All of these alternatives emphasize safety, though an investor can get a little higher return in exchange for a little more risk.

Certificates of deposit offer two guarantees: Your principal is guaranteed by the US government, and the interest rate is guaranteed at the time you buy the CD. You can improve on that slightly, however, by selecting a bank or thrift that compounds interest daily, to bring in a higher yield. (Some banks use what is called continuous compounding, which is essentially the same thing.) Last week, the average yield on a one-year CD was just over 7 percent. Many banks and thrifts, especially in Texas, are paying a percent or so more.

In the spirit of competition, banks and thrifts are continuously adding gimmicks and twists to their CDs. One of the latest is a CD rate pegged to the inflation rate. This one, offered by Franklin Savings in Ottawa, Kan., has a $50,000 minimum and a guarantee that the rate will be adjusted monthly to stay at least three percentage points above the consumer price index. You may be able to do better, however, by scouting out one of the higher-yielding CDs around the country.

Treasury bills are also backed by the federal government. In fact, they are probably even more secure, which is one reason their rates are slightly lower. The average rate on three-month bills last week was 5.69 percent, while the rate on six-month bills was 6.17 percent. Treasury bills can be purchased through banks, brokerages (for a fee), or directly from one of the 12 regional Federal Reserve banks.

US Savings Bonds aren't the stodgy choice they used to be. An investment of $25 to $5,000 doubles in eight to 10 years, depending on the interest rate. Now, the return is 85 percent of the average yield on five-year Treasury notes and bonds. And if you hold them at least five years, you get a minimum return of 6 percent.

Also, the interest on these Series EE bonds is exempt from state and local taxes, and the federal tax is deferred until they're cashed in. But the tax can be deferred further at maturity by exchanging them for Series HH bonds. The 6 percent interest on HH bonds - paid twice a year - is taxed annually, but if that interest comes from money earned in the EE bonds held earlier, you'll be using tax-deferred dollars to pay the tax bill.

Savings Bonds, of course, carry the same government guarantee as T-bills.

Money market mutual funds don't have federal guarantees, but they do have a perfect track record: No investor has ever lost a penny of principal in a money fund. Nearly every mutual fund company has one, or has a relationship with another company's money fund, letting you move money in and out with a phone call. At most, the minimum investment is $1,000, though at a few, like Twentieth Century in Kansas City, Mo., there is no minimum.

There are two basic types of money fund: taxable and tax free. While tax-free funds pay lower yields than the taxable variety, the yields within each group are usually about the same no matter what fund company is offering it.

In recent months, however, there have been some differences. Around the time of the Oct. 19 stock market tumble, interest rates were quite volatile. Some fund managers did a little better job guessing at the direction of rates and could offer slightly higher yields.

Also, some fund managers are boosting their yields slightly by purchasing Eurodollar obligations and money market instruments issued in the US but based on foreign currencies. Since some of the foreign banks issuing these instruments aren't required to keep as much money in reserve as US banks, they can pass higher yields on to their depositors.

The fund managers that buy financial instruments from these banks say they do a more thorough check of the banks' finances, but if you prefer a fund that invests only in US commercial paper, ask the fund about its investment policies before sending your check.

While money funds don't have federal backing, they do have the advantage of liquidity: You can get all or any part of your money out whenever you want, without penalties or loss of interest. And if the stock market tempts you again, you can move some money into a stock fund with a phone call.

Recently, a few fund companies have introduced funds that invest in short-term US government obligations. Unlike money market funds, the share price on these can fluctuate, so there may be a little risk to your principal, but the yields are usually going to be slightly higher than the money funds offer.

If you have a question that would make a good subject for this column, send it to Moneywise, The Christian Science Monitor, One Norway St., Boston, MA 02115. No personal replies can be given by mail or phone. References to investments are not an endorsement or recommendation by this newspaper.