New look at money-market funds after a US ruling

The Federal Reserve Board (Fed) shocked the money-market mutual funds earlier this year when it issued an emergency order requiring them to keep 15 percent of their funds in noninterest-bearing reserves.

The Fed later revised the order to allow funds with less than $100 million in assets to ignore the 15-percent reserve requirement. Also, funds with more than assets did not exceed the total as of March 14. Another ruling by the Fed excluded funds invested in personal trusts, pension accounts, except individual retirement accounts (IRA), and certain funds with tax-exempt securities.

As a result of the 15-percent rule, yields are expected to be lower, because only 85 percent of the invested funds are working. Earnings from the 85 percent must be spread over 100 percent of the money deposited to investors.

Managements of the money funds reacted immediately to stop advertising and, in some cases, to stop accepting deposits until they could sort out alternatives. Now that the smoke has cleared a bit, you can look at these alternatives for investing your short-term funds in a money-market fund for maximum yield.

* The simplest way to avoid a problem and steer clear of funds with the 15 -percent requirement is to pick a fund with less than $100 million in assets. If Fund A has $65 million in assets, it can accept $35 million more before it runs up against the $100 million ceiling. These funds may be filling fast. For a complete list (13 funds recently) write to Donoghue's Money Fund Report (Box 540, Holliston, MA 01746) for a sample copy of the report listing the under-$100 million money-market funds.

* If you have money in a fund that exceeds the $100 million exemption, you should probably consider leaving it there. Some funds have told shareholders that new deposits won't be accepted. By keeping total assets under the March 14 level, the funds avoid the 15-percent requirement.

* Many of the aggressive money-market funds with assets over $100 million are not accepting new shareholders. But, as money is withdrawn, some working space under the March 14 level develops. These funds may then accept additional deposits from shareholder in a big money-market fund and want to put in more cash, contact the fund to see if it is taking more deposits.

* If you are a new money-market fund investor or your present fund is not accepting new money, you may opt for a small fund or one of the new "clone" funds. To avoid mixing new money with money on deposit before March 14, many of the bigger money-market mutual funds have established a second fund. Money deposited in these so-called "clone" funds is subject to the 15-percent reserve requirement. As a result the "clone" fund is likely to be your third choice -- all other things being equal.

But one must still consider differences between funds, including makeup of portfolio and minimum deposits accepted.