Due to the poor performance of the long-term municipal bond market, short-term fixed-income securities have become increasingly popular as well as getting high, tax-free yields. Within the past two years a dozen mutual funds, intended to allow small investors access to this market, have sprung up.
The newest, the T. Rowe Price Tax-Exempt Money Fund, was announced today. It is the eighth member in the Rowe Price family of noload (no commission) mutual funds. The new fund will invest in a diversified portfolio of high-grade, short-term municipal securities -- such as U.S. government-guaranteed project notes issued by localities to finance low-income housing, and tax-anticipation notes issued to help cities get working capital. The funds's initial capitalization is $250 million.
In an effort to maintain shares at $1, the overall portfolio will have a dollar-weighted average maturity of 120 days or less. The minimum initial investment required to open an account is $1,000. The initial yield is expected to be in the 6 1/2 percent to 6 3/4 percent range.The investment offers check-writing features and is completely liquid -- that is, funds can be withdrawn at any time without penalty or commission.
According to the Investment Company Institute, sales of long-term, tax-exempt bond funds amounted to $1.8 billion last year. Short-term funds had sales of $5.3 billion. Wiesenberger's Investment Companies Service calculated the average yield of the longterm funds at 8 1/2 percent at the end of last year, but the value of the funds declined by 12.9 percent. The newer, short-term funds had an average yield of 6.3 percent at the end of February, but the share price remains constant in the manner of money market funds.
The chief advantage of the short-term over the long-term funds is as a means of preserving investor capital even at the expense of yield. Both types of funds are intended for institutions, trusts and individuals in income tax brackets of 50 percent or higher.