What the money-market mutual funds offer

Money-market mutual funds may not be fully understood, if numerous letters from readers represent a valid sample. Money-market funds take their name from the types of investments that the funds make, including certificates of deposit, bankers acceptances, US Treasury bills, and short-term notes and commercial paper.

In every other respect, however, money-market mutual funds are like hundreds of other mutual funds, and they are regulated by the Securities and Exchange Commission. A money-market mutual fund is not likely to be a "fly by night" operation, as one reader has suggested. The funds operate under tight supervision, and funds remain in the control of a custodian bank.

Still, money-market funds may not be suitable for all investors. They offer an alternative to depositing money in savings and loan associations or in banks, and they gain a higher interest yield. The funds offer quick access to your money through a variety of means -- direct check writing, wire deposit to your bank account, or by telephone.

Minimum deposits, typically $1,000 or more, permit access to high yields without the $10,000 minimum required for Treasury bills or high-interest-yielding certificates of deposit available at banks and savings and loans.

Along with these advantages, however, are related disadvantages. Money-market mutual funds are not intended as a long-term investment. The short maturity of their holdings aids liquidity and security but provides no appreciation potential. Yields change on a daily basis, and a projection of continuing high yields is unwarranted. Moreover, the federal government has recently required these funds to begin setting aside 15 percent of new deposits in noninterest-bearing accounts, an action that somewhat reduces interest yields.

Thus, cash you place in a money-market mutual fund should be considered parked -- waiting for a longer-term investment or for spending later. An investment in either deep-discount bonds (bonds sold for less than their face value) or utility income stocks during this period of high interest rates could "lock in" current high yields.

Another disadvantage for some persons is that to invest in a money-market mutual fund, you must take action on your own. Since the funds are no-load (meaning there is no commission for buying into the fund), you must write for an application, complete it, and send in the money yourself, rather than give your money to a teller or a broker.

Track records or past performances of money-market funds have less meaning than for stock or bond funds. You could check past records in the Mutual Funds Almanac, published yearly by the Hirsch Organization Inc., 6 Deer Trail, Old Tappan, NY 07675 ($20 for 1979 ed.) or Donoghue's Money Fund Directory, Box 540, Holliston, MA 01746 ($10 for most recent edition).

Less expensive would be a comparison of funds from information in their individual prospectuses. Write or call several of the money-market funds and ask for an application and prospectus. You will receive a copy within a few days. Before sending off a check, be sure to read the information provided in the prospectus.

A money-market fund is serviced by a custodian bank that accepts your money, issues share account records, and pays checks drawn against your account. These banks tend to be clustered in the big money centers, New York, Boston, Philadelphia, Los Angeles, and others. However, in answer to one reader, I know of no list of funds serviced by New York City banks. This information is readily available from each money-market mutual fund application. Of several funds, one or more will likely be serviced by a New York bank.

Generally, you are better off to work with a bank remote from your address, because the funds in your account continue to earn dividends until the check arrives at the custodian bank for payment.

For a free list of money-market mutual funds, write the No-Load Mutual Fund Association, Valley Forge, PA 19481.