A Safety Zone When Rates Rise

When the going gets tough, some investors run for cover.

With both the stock and bond markets on a roller coaster, cash looks like a bargain. The money market, in financial jargon, is where you earn decent interest, with no risk. And lately, investors have been flocking to money-market mutual funds to find it.

Almost $1 trillion dollars now sits in these boring but safe funds, with almost $9 billion arriving in the past week alone, according to IBC Financial Data.

Much of the money, analysts say, is parked temporarily by refugees from the volatile stock market.

"We're staying steady and growing," says Bill Quinn, president of American AAdvantage Money Market Fund in Dallas.

His customers evidently aren't tantalized by the stock market, despite last week's record high. New money is flowing into the $1.8 billion fund.

Little wonder. Mr. Quinn's fund is one of the higher-paying money funds. Its current annual yield, on the "plan ahead class," is about 5.4 percent (800-231-4252).

Here's Quinn's strategy for maximizing returns in the months ahead: He sees short-term interest rates inching up. So Quinn is going "short," buying short-term securities.

That will enable him to buy higher-yielding instruments as they become available - thus boosting total yield.

The average maturity in his portfolio is now 40 to 45 days, compared with his more typical 60-day average. The average maturity period for all taxable money funds is 51 days, according to IBC.

Like Quinn, other top money fund managers scramble for ways to maximize yields without risking customers' money.

The yields range from less than 4 percent for tax-free funds to 5.9 percent for the nation's top yielding, taxable fund.

Average yield for taxable funds was 4.98 percent, as of May 12, up from 4.96 percent the week before.

People like these funds for a simple reason. They pay much higher rates than a bank's passbook savings or money-market accounts. The latter, for example, pay about 2.65 percent on a national average. And while rates for CDs (certificates of deposit) run higher, they lock up your money for months.

With a money-market mutual fund, you can tap your cash virtually any time. Many allow check writing, with a $100 to $500 minimum.

It's true that banks are safer, because they are federally insured. But risk in a money-market mutual fund is negligible, largely because the funds invest in the safest of all bonds.

Finding a money-market mutual fund is easy, despite more than 1,000 of them in the marketplace.

Simply check out the money-market fund listings in a newspaper's Sunday business section and pick one with a yield that looks good.

Slight differences in yields make almost no difference in your earnings, unless you've got millions to park, so it's hard to go wrong.

But some funds have higher expense ratios (what the fund charges customers for expenses). Anything over 0.7 percent is more than you need to pay, but, again, the impact is minimal. These funds have minimum investment levels, from $1,000 to $20,000, so be sure to ask.

All the big mutual fund companies - Vanguard, Fidelity, T. Rowe Price, Putnam, etc. - offer money funds, and their expenses are usually among the lowest.

Among funds that invest only in government debt, Lake Forest Money Market Fund (800-592-7722) now pays the highest yield: 5.44 percent. Top tax-free money funds include Fidelity Spartan Municipal and Strong Municipal, both near 4 percent.

One alternative to money funds: ultrashort-term bond funds, which pay higher interest. The Dreyfus Short-Term Income Fund (800-782-6620) currently yields 7.08 percent. The Strong Advantage Fund (800-368-3863): 6.48 percent. Unlike money funds, however, share price for a short-term bond fund can rise or fall.