Syndicated columnist Chuck Jaffe says that with interest rates so low, savers may need to look at online bank accounts for better deals.

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With Treasury yields at ultralow levels, many money-market fund investors are wondering if they need to move up the risk scale, moving their cash into prime money-market funds or other investment vehicles to squeak out just a bit more yield.

For savers or investors hoarding cash, the real question should not be whether to invest in a higher-yielding money fund, it should be whether to leave funds altogether for the better returns available in ordinary savings accounts, particularly high-yield online bank accounts.

From a yield standpoint, the question is easy to answer; from a practicality perspective, it’s a bit trickier. To see why, let’s examine the current conditions and how they impact choices.

Money-market funds are ultra-safe investments, buying interest-bearing securities that mature within a year, and frequently within a week or month. Their holdings run from certificates of deposit to Treasury securities, from insured notes to asset-backed commercial paper. Unlike ordinary mutual funds, money funds try to maintain a constant price of $1, although last September the Reserve Primary Fund actually “broke the buck,” creating losses for investors.

Money-market funds differ from money-market bank accounts because they are not insured by the Federal Deposit Insurance Corp. (FDIC), which currently entitles account holders at protected institutions to up to $250,000 in coverage against a bank failure.

After the failure of Reserve Primary fund, many investors who might otherwise have put their cash in a money fund decided that they wanted an insured vehicle, either a money fund invested entirely in Treasurys or a bank account with FDIC protection.

With Treasury yields being so low, those investors are faced with accepting almost nothing, or stepping up the risk scale. Or, they can move from a fund to a bank account.

According to Crane Data, which publishes Money Fund Intelligence, top-yielding money-market funds are earning anywhere from 1.7 percent to just over 2 percent, but many of those top funds are actually closed to new investors as management struggles to maintain yields. Average money funds earn closer to 0.5 percent.

By comparison, the top online savings or money-market bank accounts are yielding north of 3 percent.

“Online banks have a decisive advantage in yield [over money funds] currently, so you do have to wonder why more people would not just take their money out and get the FDIC insurance,” says Connie Bugbee, managing editor at iMoneyNet, which tracks money-fund rates. “But some people have an ongoing fear of banks, or don’t want to go through the hassle of opening an account online, and then there’s inertia.”

After yield and protection concerns, the decision boils down to convenience, habits and account rules.

Some investors use money funds for parking cash that can be moved to an investment account on a moment’s notice; for someone concerned with liquidity or trying to make tactically timed moves would not want to wait the two days that the typical transfer from online account to checking account takes (and then face another day or two before the funds are ready to invest in their brokerage account). Likewise, many high-yield savings and money-market accounts offer limited check-writing or deposit privileges that don’t occur in money funds.

And money funds credit interest earned daily, whereas most online savings accounts accrue interest but don’t add it to the account until the end of the month, so that an investor who leaves before the end of the bank’s accrual cycle will give up several weeks of interest if they mistime their exit.

“There is a hassle factor, where people don’t want to go through the trouble of opening an account or moving money around to get an extra 1 percent on their money or to get the FDIC insurance when they don’t think a money fund is going to fail,” says Peter Crane of Crane Data. “It makes sense if you are just parking money, but if you are one of those people affected by inertia — where you think you’ll hold cash for a few days or weeks but you end up staying there for six months — then earning more interest clearly makes more sense.”

Crane noted that investors underestimate the opportunity cost on both ends. They think the extra interest earned is insignificant when it clearly can add up quickly — especially in a market environment where so few options are actually positive — or they go into the bank account and ignore what it will cost them when they find “the right time” to buy into the market but can’t put their cash to work for several days trying to move it around.

Says Crane: “A high-yield bank account is going to be an attractive option until money funds at least get close in yield. … If someone is ready to go up the risk scale to improve their yield, they have to decide if they are better off just leaving money funds altogether right now.”

Copyright 2009, MarketWatch

Chuck Jaffe is a senior columnist at MarketWatch. He can be reached at or Box 70, Cohasset, MA 02025-0070.