Money markets find fans at 30

"Show me the money" takes on new meaning in the first decade of the 21st century.

The money - at least, money held by investors, small savers, and many large institutional account holders - is increasingly found not only in passbook savings accounts or bank certificates of deposit, but also in money-market mutual funds.

There's lots of it: More than $2 trillion, up from $1 trillion in the fall of 1997. In this day and age, people often use money-market funds as their primary savings accounts.

Yet, money funds, as common as they have become, are a relatively new financial tool compared with stocks and bonds. Thirty years ago this month, on Oct. 8, 1971, Bruce Bent, founder of the Reserve Fund family of mutual funds, introduced a new way to manage money.

Mr. Bent, along with his then-partner Harry Brown, combined the mutual-fund concept - in which a manager buys and sells securities such as stocks and bonds to provide highest possible returns - with a share price that stays the same daily: the $1 net asset value.

Money funds were to be share-based. The amount of your assets would be equal to the number of shares you held - at a dollar a pop. The securities in the funds were not stocks, however. Instead, they would include short-term financial instruments of high quality, such as Treasury bills, certificates of deposit, and bankers' acceptances. Returns would be slightly better than for comparable bank products, such as savings accounts.

But when Bent took his idea to federal regulators, they didn't understand the concept. Bent recalls that the regulator he talked with back then put his papers "on a window ledge, and said to check back with him." When Bent returned several months later, the papers remained undisturbed on the same window ledge.

But with persistence, Bent finally got his product under way in early 1971. The account minimum was $1,000, the same as it is now for the Reserve Fund. Money began to pour in, and competitors soon introduced their own versions.

Today, there are some 1,042 money-market funds in the US, 706 of them taxable funds and 336 tax-exempt municipal funds, according to Chris Wloszczyna, a spokesman for the Washington-based Investment Company Institute (ICI), the main association for the mutual-fund industry. Money funds account for nearly one-third of all mutual fund-related assets (Most fund assets are in stocks.)

Of the slightly more than $2 trillion in money funds, about half, says Mr. Wloszczyna, are in "institutional" accounts for pension funds, banks, and other large corporate financial concerns seeking an easy way to manage short-term assets.

The money-market concept proved popular with smaller investors, Bent says, because they quickly saw it was "a highly efficient way to manage cash." Money funds were safe, highly liquid, and posted yields competitive with or exceeding short-term bank accounts.

Money funds offered by mutual-fund companies are not federally insured, and have had very few "runs" involving withdrawals by panicky investors. But for all practical purposes, the funds have proven to be reliable and safe.

Today, a number of financial institutions, including Reserve, offer accounts linked to insurance protection. Such accounts are actually bank accounts administered by fund companies.

Taxable money-market accounts are now yielding about 2.5 percent, says Peter Crane, vice president and managing editor of iMoneyNet Inc., which publishes data on money-market accounts. A few funds do crank out far higher yields. (See chart below.)

Mr. Crane sees Bent as a visionary who had the tenacity to pursue his dream of a new type of investment product. "The money-market concept would probably have happened eventually, but it needed someone as committed as Bruce Bent," Crane says. "Bent probably cut a decade off the calendar" in which the accounts would have been offered, he says.

Inflows have been heavy into money funds this year - up $27 billion in August alone, according to the ICI - as individuals have fled a tumultuous stock market.

But Crane believes the cash flows may soon reverse, given low interest rates. The only other time rates fell as low, he says, was May 1993, when yields hit 2.6 percent. After that dip, Crane says, investors began pulling money out of their funds to move to better paying investments.

Assuming that the stock market rallies during the next year, money will probably shift back into equities, Crane says.

Still, money-market funds - the little product that Bruce Bent couldn't get federal regulators to understand - will continue to be around, doing as they have always done: providing a liquid, safe place with a decent rate of return for short-term cash holdings.