Banks' money market accounts vs. mutual funds

A carrot is the latest weapon in the battle between the money market mutual funds and the banks. The vegetable belongs to the money funds, which are using it in newspaper and television ads to demonstrate their case that service charges and special restrictions take big bites out of the yields on the new money market deposit accounts (MMDA) offered by banks and savings and loans.

This and other recent ads, sponsored by the Investment Company Institute, the mutual funds' trade group, represents the first time the mutual fund industry has launched a ''generic'' advertising campaign to represent all ICI companies. Until now, all mutual fund ads have been placed by individual fund companies.

It would seem the ICI picked a good time to pull out its carrot. When the MMDAs were introduced by the banks late last year, they were offering yields several percentage points above the money funds. While the funds' yields were down around 9 or 10 percent, some of the banks were paying 15, 16, or even as high as 20 percent.

Now, however, those come-on yields have disappeared, and the banks and funds are almost even. In some cases, in fact, you can get a slightly better yield, with far fewer restrictions, in a money fund. According to the latest issue of Bank Rate Monitor, published by Advertising News Service in Miami Beach, the average yield on MMDAs offered by banks and thrifts was 8.14 percent, as of April 27. For the same week, the 7-day Donoghue Money Fund Average stood at 7.91 percent. But a quick search through the Donoghue Money Fund Report finds several funds paying 8.2 percent or better.

Even though these yields are nearly the same, Money Fund Safety Ratings, a newsletter published by the Institute for Econometric Research in Fort Lauderdale, Fla., has found three often-used tactics that can deny full interest on the MMDAs:

* Some banks have special rules regarding minimum balance. Federal law requires the bank to cut the interest to 51/4 percent whenever the MMDA balance falls below $2,500. Some institutions calculate this on an average daily basis, which gives the depositor the best chance to maintain high yields. But other banks and thrifts reduce your rate for the entire month if the balance falls below $2,500 for any day of that month. And ''month'' can be a calendar month, or the banks can use a cycle that begins on a date based on the number of your account or the first initial of your last name.

There can also be high ''service charges,'' such as one bank's $7 fee for balances that fall below $2,500.

* Many institutions pay no interest at all on the month an account is closed, even if the closing comes on the last day of the month or payment cycle. So if you want to close your MMDA, do it on the first or second day of your cycle, or you'll lose the few days' interest earned in that period.

* Some banks do not start paying interest for several days after an account is opened, on the grounds that they must wait a few days for your check to clear. The length of the wait depends on where your check was drawn. However, the fund newsletter says, the Federal Reserve System pays banks for 99 percent of domestic checks on the next or the second business day.

It would seem, then, there are two ways to avoid these extra charges and fees: Call the banks and savings and loans in your area and ask them which of these fees they impose, or open a money market fund, where all interest is paid until the day of withdrawal, there are no service charges, and you receive full interest on all balances.

Annuities for retirement income

My husband will retire in 31/2 years at age 65. His pension is so small it is practically nil. We are attempting to invest our money as wisely as we can to have income for retirement. At present, we own our own home and have accumulated and loans, and an IRA.

It has been suggested to us that we put $30,000 into a four-year tax-deferred annuity. Is this a safe and wise investment?WS- B. P. Yes, it can be both safe and wise, provided you select the insurance company carefully. You should be able to find a four-year annuity guaranteeing a rate of about 11 percent. If you do decide on an annuity, be sure to select a well-established firm with at least an A rating from A. M. Best, the insurance-industry rating firm.

Then again, considering what interest rates have done in recent years, you may want to look into something that has a shorter term. At many brokerages, you can buy ''Ginnie Mae'' certificates currently paying about 113/4 percent. The rate stands as long as mortgages on the homes backing the certificates are being paid off. In terms of interest, that three-quarters percent difference can pay you 7 to 8 percent more money over the long run. And Ginnie Maes are backed by the federal government.

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.

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