Money fund or deposit account? The answer may be simple

Are banks trying to encourage people to move their savings to the money market funds? Considering the way banks and savings-and-loans have been handling their money market deposit accounts - the instruments that were supposed to help give them a ''level playing field'' to compete with the money funds - it sometimes looks as if they are trying to make money funds appear more attractive, or at least the less-confusing alternative.

Since the money market deposit accounts (MMDAs) became available late in 1982 , they have sparked intense competition among the banks and thrifts. While this competition has resulted in some good deals for consumers, it has also brought on confusion. The result is a situation in which savers who are comfortable without federal deposit insurance can usually do better in a money fund.

The MMDAs offered by banks and thrifts require a minimum deposit of $2,500. As long as the balance in an individual's account stays above that level, the banks or S&L will pay something close to a ''market'' rate of interest, currently running about 8.5 percent. But if the balance falls below $2,500, the interest rate drops to 51/2 percent. It is possible to find banks paying somewhat higher interest rates; Citibank's South Dakota office, for instance, has been paying 10 percent on its MMDAs, which, like those at most banks, can be opened by mail.

So far these accounts appear fairly simple. But then competition - and complications - set in. On that $2,500 limit, for instance: Some banks and thrifts pay only 51/2 percent on the first $2,500 and the higher market rate on balances above that. The better institutions will pay the top rate on the entire balance.

Another area of confusion is in compounding - the process that takes the interest your account has earned and adds it to the balance, making this the new balance. The more often this is done, the higher your return. Some banks compound daily, weekly, or even constantly. But others only compound MMDA balances on a monthly, semiannual, or annual basis. If it is annual, you are only earning simple interest, not compounded interest.

The rates banks and thrifts pay are changed periodically. But some changes are more frequent than others. Some institutions change their rates daily, but changes can also come weekly, biweekly, monthly, and quarterly. Like compounding , more frequent changes are better for the customer if rates are heading up. If you start with an 8.5 percent rate, for instance, and interest rates rise, your account could be stuck at 8.5 percent until the rate is changed, while someone else's MMDA at another bank is now getting 9 percent.

There is a simple way to get around all this if you are looking for an account that offers complete liquidity, that is, access to your money whenever you want it, without penalty. You can take the hint banks unintentionally seem to be giving and go to a money market fund.

(If you are not seeking liquidity, you can get higher rates at banks and thrifts with their certificates of deposit when your money stays on deposit for a minimum period of time, say one month to 21/2 years.)

Money funds give almost instant liquidity. You can have money wired to a bank account overnight, or you can write a check on the fund. Interest is compounded daily and the rate changes every day, too. Many money funds have minimum deposit requirements of only $1,000, and a couple of them have no minimum.

For a time after they were first introduced, the bank and thrift MMDAs paid much better yields than the money funds, to attract money from the funds. That is no longer so. For several months, the yields on money funds have been slightly ahead of the averages for the banks' MMDAs, although it is possible to find individual funds and MMDAs that are performing somewhat above the averages.

The main advantage to MMDAs, then, is the federal deposit insurance on balances up to $100,000. For many people, that is no small reason to stay with their neighborhood bank. But the money funds' record of diversification and caution should inspire almost equal confidence, as well as providing possibly greater yield and definitely less confusion.

If you would like a question considered for publication in this column, please send it to Moneywise, The Christian Science Monitor, One Norway Street, Boston, Mass. 02115. No personal replies can be given by mail or phone. References to investments are not an endorsement or recommendation by this newspaper.