Information > Financial Terms > This page Money Market Funds As
defined by the Investment Company Institute, mutual funds whose primary
objective is to make higher-interest securities available to the average
investor who wants immediate income and high investment safety; also called
liquid asset or cash funds. This
is accomplished through the purchase of high-yield money market instruments
such as Growth. In
1981, total assets of money market funds soared to some $182 billion,
compared with $74 billion in 1980.
According to the Investment Company Institute, money market funds
in 1981 paid dividends to shareholders of $18 billion, "almost triple
the amount they would have earned if the dollars had been held in 5½ per
cent savings accounts" (5½ percent was the ceiling rate as of 1981 on
passbook savings accounts of savings departments of commercial banks).
The money market funds have been able to pay money market investments,
whose yields have risen in recent years in reflection of the anti-inflation
monetary policy adopted by the Board of Governors of the Federal Reserve
System. With thrift institutions
limited in the rates they may pay on passbook savings accounts as well
as on time savings certificates of varying maturity to levels below those
prevailing in the money market and afforded by money market funds, the
drawing power of the money market funds off thrift funds has been a serious
problem in recent years for thrift institutions.
Disintermediation (outflow of thrift funds from the thrift institutions),
compounded by the problem of operating losses incurred because of the
higher interest cost of deposits and losses incurred because of the higher
interest cost of deposits and other expenses above current earnings from
older portfolios of mortgages paying fixed rates below current rates paid
on deposits, has been threatening net worths.
(See SAVINGS AND LOAN ASSOCIATIONS, SAVINGS BANKS). Money
market funds features include (1) opening of accounts with low initial
amounts, e.g., $1,000 or $2,500, (2) free checkwriting for withdrawal
of cash at any time without penalty, (3) dividends declared daily, compounded,
or paid monthly, (4) same-day telephone withdrawals, (5) portfolio holdings
that may be diversified in the various sectors of the money market or
specialized in holdings of U.S. government securities alone, and (6) the
advantages of scale provided by investing in the large wholesale amounts
necessary in the money market (for example, $1,000,000 trading minimum
in negotiable time certificates of deposit).
Also the no-load feature and the low expenses are appealing. Since
the appeal of money market funds is their superior yield compared to the
ceiling rates imposed on thrift institutions, the gradual elimination
of such ceiling rates (see DEPOSITORY INSTITUTIONS DEREGULATION
AND MONETARY CONTROL ACT OF 1980), as well as any appreciable declines
in money market yields, might well dilute the appeal of money market funds
to investors. The
appended table indicates the growth in recent years of money market funds. Monetary Control. Money
market fund shares are included by the Board of Governors of the Federal
Reserve System in their M2 classification of the money supply for monetary
control purposes (See MONEY SUPPLY) because of the checking privileges
granted by money market funds to their holders. Early
in 1980, the Federal Reserve initiated a series of extraordinary actions
to curb inflation, some of which were taken under authority of the Credit
Control Act, of 1969, which was invoked by the President for the first
time. That act provides that
"whenever the President determines that such action is necessary or appropriate
for the purpose of preventing or controlling inflation generated by the
extension of credit in an excessive volume, the President may authorize
the Board [Board of Governors of the Federal Reserve System] to regulate
and control any or all extensions of credit." Among
the severe restraints imposed on inflationary forces announced on
With
the entry into the financial services field in latest years of nonbanks,
offering such services as cash management accounts with checking privileges,
an open question as of 1982 continued to be whether legislation might
in the future subject such nonbanks, including money market funds, to
monetary regulation and control. BIBLIOGRAPHY Donoghur's
Money Fund Report.
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