Money market accounts: Weigh safety vs. rate of return

Oct 01, 2004, 4:00am

Despite recent historically low yields, many investors use money market mutual funds for simple liquidity needs, as well to provide a parking place for emergency reserve dollars.

Q. What is the difference between a money market account at a bank and a mutual fund company's money market account?

Due to the inherent lack of guarantees, money market mutual funds typically offer the ability to achieve a higher rate of return through higher dividends or interest. Although it is certainly possible to lose money in money market mutual funds, they are specifically designed to maintain a fixed price per share, typically set at $1.

Interest rates play a major role in the direction of money market returns, since the return is purely a function of yield as opposed to any longer-term growth potential. Despite recent historically low yields, many investors use money market mutual funds for simple liquidity needs, as well as to provide a parking place for emergency reserve dollars. Withdrawing money early, prior to the stated maturity date of a CD, will cause penalties to be assessed to the account.

On the other hand, many money market funds encourage withdrawal flexibility by offering check-writing privileges, allowing shareholders to make payments directly to themselves or simply pay bills. Some money market accounts, however, only allow checks to be written for amounts greater than a stated minimum, such as $250 or $500. Investors will often shift stock-market-invested dollars into money market accounts to avoid potential downward principal fluctuation, especially during turbulent periods of the stock market.

With the goal of achieving returns higher than those offered by money market funds, investors have also been investing in short-term bond mutual funds. In contrast to money market mutual funds, short-term bond mutual funds carry a greater probability of some fluctuation of principal value. Any mutual fund, including those that invest in obligations of the U.S. government such as Treasury bills, notes and bonds, are subject to principal fluctuation. Thus, total returns cannot be guaranteed.

Regardless of the financial vehicles used, it certainly makes sense to keep an emergency fund. Dollars needed for upcoming large purchases should also be kept in a relatively safe liquid account.

At the same time, it's prudent to only use accounts that generate some type of positive return or yield. In order to achieve true positive "real rates of return" - defined as the after-tax/after-inflation rate of return of any given investment - actively compare the various money market accounts available in the financial marketplace today.

Q. I'm becoming more concerned about my elderly father living at home by himself since my mother died last year. What other housing options should we consider?

With the aging of the American population, senior citizens and their families are being confronted with a wide choice of housing options. Factors to consider are the individual's age, interests, finances and, of course, health issues and concerns.

Choices available today include: independent living, assisted living, nursing homes, continuing care communities and staying at home.

Independent living is a great option for active seniors who can take care of themselves and prefer a social versus medical setting. The facility typically can accommodate a broad range of lifestyles. Often included are in-house activities and transportation to shopping and other "outside" events.