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Money Market Funds
Source: Encyclopedia of Banking & Finance (9h Edition) by Charles J Woelfel
(We recommend this as work of authority.)

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 U.S. government securities, bank certificates of deposit, bankers acceptances, and commercial paper.

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 5 per cent savings accounts" (5 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 March 14, 1980 , was the imposition on money market funds of special deposits by the Federal Reserve equal to 15% of the net increases in their assets after March 14, 1980 .  Such a setaside in cold cash reduced the yields afforded by the money market funds subject to the action, but the mutual fund industry responded by organizing "clone" money market funds, new money market funds having the same features which continued to attract investors.  However, both short- and long-term interest rates "dropped precipitously as money and credit demands fell off and signs of economic de-imposed by the Fed.  Accordingly, the Fed reduced its discount rate phaseout of the special credit restraint measures on May 22, and financially on July 2 announced plans to complete the phaseout, including lifting of the special deposits requirement imposed on money market funds.

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.  Periodic.
INSTITUTE FOR ECONOMETRIC RESEARCH.  Money Fund Safety Ratings.  Periodic. INVESTMENT COMPANY INSTITUTE.  Fact Book.  Annual.
Weisenberger Investment Companies Service.  


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