Many money-market mutual funds are expanding their services to savers and investors. They want to hold on to your business, and keep you from switching money into the money-market deposit accounts at banks and savings and loan associations. What's going on:
* The Dreyfus Corp., in New York City, owner of the $9.2 billion Dreyfus Liquid Assets fund, bought a bank in East Orange, N.J., and renamed it the Dreyfus Consumer Bank. It's offering low-rate auto loans by mail to the 69,000 New Jersey residents who own shares in any of Dreyfus funds, as well as to local, walk-in customers. Eventually, it expects to offer competitive auto, mortgage and personal loans to its 1.3 million shareholders throughout the country.
Its current auto loans are for Ford and Chrysler products only. On models where auto dealers will provide 9.9 and 9.8 percent financing, the Dreyfus Bank is offering 9 percent. On the Ford models carrying 11.9 percent financing at a dealership, Dreyfus offers 11 percent. The bank's standard auto loan is pegged at 12.9 percent over 48 months, which is a lower rate than that offered by many other banks.
Dreyfus says it can undercut banks on rates and fees because it deals with most of its customers by mail, which is more efficient than dealing with them face to face.
* The Vanguard Group in Valley Forge, Pa., has started a privately insured money-market fund to compete with the federally insured deposits available at banks and S&Ls. The St. Paul Fire and Marine Co. will guarantee shareholders against any default in the fund's investments, and cover individual accounts up to $2 million each. The Travelers Corp. is also working on a money fund that it will insure itself--but that arrangement has yet to be approved by the Securities and Exchange Commission.
The cost of the insurance lowers the yield on the Vanguard fund by around 0.4 to 0.5 percent--and most fund managers think that's too big a price to pay. Uninsured money funds have proven to be highly safe. Investors who worry about the security of a money fund's investments can choose a fund that invests solely in U.S. government securities.
* Several money funds that had relatively large minimum deposits have lowered their minimums to $1,000. And several funds have lowered the minimum size of the check that investors can write against their fund account. Some funds now offer unlimited checking.
* The Reserve Fund in New York, together with Pittsburgh's Mellon Bank, is offering a cash-management fund for savers or investors with $10,000 or more. You can get unlimited checking on your Reserve Fund account, a Visa and MasterCard, a $2,000 unsecured line of credit from the Mellon Bank, a "sweep" arrangement with a brokerage house for moving money between the reserve fund and your brokerage account, monthly consolidated statements of all your transactions and a year-end summary to help with tax preparation.
The Fidelity Group in Boston has a similar account. Fidelity can also arrange to have your paycheck deposited directly into your money-fund account each month, and provide you with automatic bill-paying services.
* A recent change in the rules for interest-rate advertising will strengthen the money funds' hand in their competition with banks. Until last month, only banks, S&Ls and credit unions were allowed to advertise compound interest rates, which take account of the interest you earn on interest. The money funds were allowed to advertise only "simple" interest rates, which do not take compounding into account. So the money-fund rates always looked smaller than they really were.
For example, a money fund offering 8 percent simple interest could be paying exactly the same amount per $1,000 invested as you would earn from a bank offering 8.3 percent interest compounded daily. But to most savers, it appears that the bank is paying more.
Now, the money funds will be able to advertise compound rates, which could boost their advertised yields by 0.3 to 0.5 percent.
Warning: William Donoghue, publisher of the influential Donoghue Money-Fund Average (which reports on what funds are currently yielding), will continue to use simple interest rates, because it better reflects what savers actually earn over short periods of time like seven days. In their advertising, many banks and S&Ls compare their own, compound rates with the Donoghue's "simple" money-fund average. So in the bank ads, it will still appear that the money funds are paying a little less than is actually the case.
On average, banks, S&Ls and money funds are now paying about the same. Your choice between banks or funds should now come down to service and convenience, rather than yield.