Money-Market Deposit Account

Money-Market Deposit Account

The money funds became so popular that hundreds of billions of dollars were drained out of bank deposits into these higher-yielding mutual funds. Needless to say, the banks sought ways to compete. And so, in another example of how deregulation benefits the consumer, the banks were allowed to offer money-market deposit accounts to individuals. At the out-set banks offered promotional rates that were well above the yields offered by the money funds. Indeed, initially some money-market deposit accounts had a yield advantage of 2 percentage points. Savvy consumers, chasing the pettiest rate in the market, deserted the money funds in droves.

In the mid-1980s, however, the money funds enjoyed renaissance. The banks, having reestablished themselves, quietly reduced the rates they were offering so that the money funds then had a ½ to 1 percentage point advantage over the deposit accounts. Money began to return to the funds and now both types of investments have hundreds of billions of consumers' dollars.

How should you decide between the two? Each has its own advantages. The banks enjoy important attractions. First, like other bank deposits, money-market deposit accounts are insured by an agency of the federal government. Thus, they score at the top of the scale for worried insomniacs. In addition, it's convenient to invest in money-market deposit accounts, since banks have branches, while money funds only have post office boxes and toll-free telephone numbers. But the money funds have their own advantages. Their yields tend to be a good deal higher than the bank accounts, as noted above. Indeed, during periods when interest rates have been rising, the differential in favor of the money funds has tended to widen as the banks have been slow in raising posted rates.

In addition, the money funds allow an unlimited number of checks to be written against balances (although each check must be written for a determined sum as a minimum, depending on the fund). The deposit accounts allow only three checks per month (for any amount. Bank do offer so-called Super NOW deposit accounts that allow unlimited checking and these accounts can be very useful for investors who can meet the minimum deposit requirements. The interest rates on Super NOWs are, however substantially below the returns on money-market deposit accounts).

Money funds also offer wire transfer facilities that permit money to be moved around overnight. Moreover, since money funds are typically part of a large mutual fund or brokerage complex, they are an ideal place to “park” cash at high earning rates awaiting movement into more permanent investments. Finally, it is possible to find that invest only in tax-exempt securities so that high-bracket investors can earn considerably higher after-tax yields.

One of the best ways to obtain extra investment funds is to avoid taxes legally. Photo by Elena.