A kind of panic seems to have set in among savers. Even widows and orphans have come to realize that it's crazy to keep their ready money in 5 percent passbook savings accounts. So they're turning, in record numbers, to high-interest-paying money-market mutual funds.
Money funds took in $39.5 billion in July, the highest ever for a single month. Almost as much money is deposited in money funds as in all the savings banks of America.
But money funds carry no deposit insurance, which is a frightening thing to conservative people who depend entirely on their savings. So they're pouring their cash into money funds that buy only government securities. It is assumed that government-securities funds will be safer than the funds that buy big-bank certificates of deposit or commercial paper from top American corporations.
In recent months, government-securities money funds have been growing at twice the rate of other money funds. A year ago there were only eight funds that limited their investments to government securities. Now there are 19, with more in the process of registration. These funds appeal especially to conservative savers or to people who do not know much about how other money funds work.
A recent giant seller, for example, was the U.S. Government Money Market Trust, sold to members of the American Association of Retired People. Last week, Sears Roebuck and Co. announced that it, too, would start a government-securities fund, the first to be sold to store customers through retail outlets.
(For a free list of the names, addresses and toll-free telephone numbers of many money-market mutual funds, send a self-addressed, stamped envelope to the Investment Company Institute, 1775 K St. NW, Washington, D.C., 20006. Funds that specialize in government securities will be separately checked.)
The question, of course, is whether government-securities funds really are safer than other funds.
The issue of 'safer' falls into two parts: (1) Is there any risk that the underlying investments will fail to pay off on time? (2) Is there any risk that rising interest rates will push down the value of your fund shares, so that each dollar you deposit will be worth something less? With money funds, neither of these is supposed to happen.
The savers flocking to government-securities funds worry mostly about the first area of risk. Banks (such as Franklin National) might fail and companies (such as Penn Central) might not be able to pay off their debts, but the federal government will always redeem its securities when they fall due.
Fund managers who buy bank certificates and corporate commercial paper have to analyze them carefully, to be sure the credit is good. But managers of government-securities funds (and their investors) don't have to worry about credit risk. In that sense, government-securities funds are the bluest of blue chips.
But there's another area of risk, which affects all types of money funds and affects them equally.
If your money-fund manager buys too many longer-term investments (generally defined as investments lasting six months or more), and if interest rates rise, the value of your money-fund shares could drop to something less than you paid. To meet redemptions, securities might have to be sold at a loss.
So an even more important thing to watch for, in judging a money-market fund, is the average number of days in which all the investments in its portfolio mature. With a short average portfolio maturity (say, 30 days or less), you can be reasonably certain that there will always be enough cash on hand to reinvest at higher interest rates and to meet redemptions. This should assure that the value of your shares will not decline.
Many newspapers include the money funds in their financial tables. The listing shows each fund's average portfolio maturity.
Government-securities funds generally have short maturities as well as their blue-chip investments. You pay for this security in slightly smaller yields. A study done by the Reserve Fund in New York found that, over the past 10 years, Treasury bill yields averaged 2 percent less a year than the yields on certificates of deposit.