Now that the initial excitement has died down, let's look at the new accounts being offered by banks and savings and loan associations.
There are two different kinds of accounts: the money market deposit account and the Super-NOW for "negotiable order of withdrawal" account. Both were authorized by the Depository Institutions Deregulation Committee in response to congressional direction to provide an instrument "directly equivalent to and competitive with money market mutual funds."
The new accounts certainly are competitive. Although there has been no mass stampede out of the funds, their total investments did drop, from more than $225 billion in early December to under $210 billion by mid-January.
While there are similarities in these new accounts, you should take a good look at the differences before making a move.
Their biggest plus is that they are deposits and thus insured for up to $100,000 by one or another agency of the federal government, depending on which type of savings institutions you use.
Money market funds are not insured. However, some of them invest in corporate paper and bank certificates of deposit, which are conservative and offer a high degree of safety.
The money market deposit account and the Super-NOW account require an initial deposit of $2,500. Further, if your average balance falls below $2,500 during any period, you cannot be paid more than the regular NOW account rate of 5 1/4 percent.
Money market mutual funds generally have lower initial requirements, mostly in the $1,000 area, a few as low as $500. In addition, they normally will continue to pay their regular dividend rate if your balance falls below the initial minimum.
Most of the funds allow an unlimited number of check transfers, but with a minimum withdrawal of $500. A few funds set the minimum check withdrawal at $250. Similar unlimited check-writing is authorized for the Super-NOW account; and most institutions have set no dollar minimum on the amount of checks drawn.
In the money market deposit account there is no restriction on the number of withdrawals you may make by mail or in person. But you are limited to three third-party (bill-paying) checks a month plus three other transfers.
Which of the three alternatives is likely to pay the highest yield? There is no federal ceiling on rates that can be paid by any of the three types of accounts, so they will be set in the competitive marketplace.
My guess is that yields from the money market deposit accounts and the money market mutual funds will be very close, with little to choose between the two.
Major difference: Yields on the mutual funds vary daily with the cost of money; yields on the money market deposit accounts can be guaranteed for as long as a month, but no more. In most cases the rate will be tied to some index such as Treasury bill rates or even the average return on money market funds.
But the yield on the Super-NOW almost certainly will be lower than either of the other two accounts. That's because the savings institutions are required to maintain a 12 percent reserve against Super-NOW balances in a Federal Reserve non-interest-bearing account.
In addition, the unlimited checking privilege available in the Super-NOW account adds processing costs, and there already is some talk in the banking community of imposing fees of some kind on these accounts. But nobody has imposed any yet.
I suspect the mutual fund industry already is searching for ways to regain its competitive edge, perhaps by providing commercial account insurance to counter the major advantage of the savings institutions.
At any rate, these new accounts must be counted as good news for investors. Whether they will prove to be a boon to borrowers as well is another story.