Thaddeus Myslak heard two men discussing it on the bus, introduced himself and asked some questions.
The answers prompted the 50-year-old Navy Petroleum Office engineer to take his $10,000 savings out of the bank and put it into a program that has become one of the hottest investments in the land -- a money market fund. These funds offer twice the interest paid by traditional savings accounts; skeptics say the risks are also substantially greater.
A money market fund is a type of mutual fund, with each investor owning a share of the total pool. The stock brokerage firms and other institutions selling shares in money market funds put the pooled money into a variety of short-term securities, including U.S. Treasury notes, commericial paper and European certificates of deposit.
Money market funds have gained popularity as interest rates have risen in recent months and small investors like Myslak found they could buy into the funds for as little as $1,000 to $5,000.
Bruce Lancaster, a broker for the Paine Webber Cashfund, one of about 70 money market funds, emphasized the flexibility, which allows buyers to withdraw money at any time without penalty.
"The liquidity is one of the best factors," said Ann Wagner, a 51-year-old Annapolis office building property manager. She took $15,000 out of savings six months ago to buy into the Government Investors Trust, a money market fund based in Arlington. "If interest rates start to drop, I can take my money out and put it into something else," she said.
During the first eight months of this year, money market fund sales totaled $61 billion -- double the 1978 figure, according to the Investment Company Institute, a trade association. The number of buyers this year tripled, the institute said, from about 500,000 in early January to the present 1.5 million.
Many of the buyers are corporations and institutions with large amounts of money available for short periods, but a growing number of money fund buyers start with small deposits.
John and Mary McMurrer, both 23, took $5,000 from their savings in July to buy into a money fund. "We were earning 7 per cent in our government credit union accounts and we wanted a better rate," Mary McMurrer said. "We are now making more than 10.5 percent."
During the first month, they made $65 in interest, which was automatically reinvested in the fund, they said.
As interest rates continue to escalate in response to federal credit-tightening actions, buyer eagerness to get out of traditional savings programs at banks, credit unions and savings and loan associations and into the money market funds has intensified.
"They are giving us a lot of competition," conceded Charles Calvert, an official at the National Savings & Trust Co., a commercial bank in Washington.
To keep its major depositors from moving any more of their money out of the bank and into a money fund, NS&T officially opened a "money center" downtown this week. Calvert, the manager of the new center, said it is designed to provide corporations and individuals the interest rates and benefits that they would get from a money fund.
Small investors, however, won't be able to take advantage of the NS&T center since the minimum deposit required is $100,000. Calvert said regulations governing commercial banks prevent NS&T from accepting smaller amounts.
Credit unions and savings and loan associations also are experiencing difficulty in holding depositors who have heard of the money funds' high interest rates, easy liquidity terms and low minimum initial investments.
The Transportation Department Federal Credit Union, for example, has lost about 32 percent of its deposits in the past six months. The credit union there now has deposits totaling $26 million, compared to $38 million before.
Interest rate ceilings at the traditional savings institutions help explain some of the money movements. The most that credit unions legally can pay on regular savings accounts is 7 percent. Federally insured savings and loan institutions are limited to 5.5 percent, and commercial banks to 5.25 percent.
To stem withdrawals, may institutions now sell money market certificates that pay the higher interest rates pegged to the fluctuating Treasury bill rates. However, thoses certificates generally are for six months or more, and require a minimum of $10,000.
In contrast, the person buying into a money market fund can withdraw the money at any time.
Some money funds also give depositors check-writing powers, so that they can write a draft against the money they have paid into the fund.
But the glamour of the money funds only conceals the dangers, according to some conservative money experts.
"Yield is a function of risk," contends Ray Dowling, an official of the League Central Federal credit Union.
"The higher the risk, the higher the yield," he said.
Dowling also cautioned that any investor thinking of putting money into an opportunity that pays above the average market yield should look closely at the risk it carries.
The two risks associated with money funds are the absence of federal insurance and the volatility of the interest rates they pay.
Deposits of up to $40,000 in banks, credit unions and savings and loans typically are covered by federal or state insurance. Money paid into a money market fund doesn't have that protection.
Nor is there any assurance that the generous interest yields of 10 to 13 percent now paid by money funds will continue. Instead, those interest rates are tied to market fluctuations that go up or down, according to demands for money and government actions here and abroad.