"Of Mutual Interest"-Jason Zweig, Investing Columnist for Money Magazine
Tuesday, July 10, 2007PAUL KANGAS:It was a solid second quarter on Wall Street, with just about everything doing well. Some investors are now taking profits, if today is any example, and looking for somewhere to stash cash. Many will look to money market mutual funds. In our "Of Mutual Interest" segment , Jason Zweig, investing columnist for Money magazine, joins us to discuss these funds.
And, Jason, welcome back to NIGHTLY BUSINESS REPORT.
JASON ZWEIG, INVESTING COLUMNIST, MONEY: Thanks, Paul. Good to be with us.
KANGAS: Let's go over the basics first. What are money market funds and what do they invest in?
ZWEIG: Money market funds are essentially cash mutual funds that invest in very short-term securities issued by the federal government, state and local governments or corporations. And they tend to be very safe, but of course also somewhat lower in return than stock or bond funds.
KANGAS: Well, sometimes a fund company will in effect put its money market funds on sale by temporarily waiving fees. Jason, how does a fee waiver work?
ZWEIG: Well, what happens, Paul, is the fund company replaces its normal full fee with a partial fee. It might be half the normal rate. But whatever discount the fund company passes through goes into your return. So, for example, a typical yield right now on a money market fund might be 4.5 percent. If the fund company normally charges a full percent to manage the money and they give you a half price cut, then you're going to get another half a percent in return, so long as the waiver is in place.
KANGAS: Right. Now so on paper, fee waivers sound like a great idea for investors because they can take advantage of no fees for a while, but I know you think there's a catch. And it has to do with human nature. Why can fee waivers be a bad idea?
ZWEIG: Well, they're a bad idea, Paul, because we all tend to underestimate our own inertia. You know, we're going to quit smoking tomorrow. We're going to go on a diet tomorrow. We're going to kick the habit tomorrow. Whatever it might be. And when you know the waiver is going to expire, say, 12 months from now, it's very easy today to say, well, when it does expire, then I'll move my money to a fund that's cheaper. But the chances.
KANGAS: So you get complacent, in other words.
ZWEIG: The chances are when that date comes, when the waiver is -- expires, instead of moving your money, you're going to leave it there. And then you're going to pay the full fee which is probably much higher than you could get elsewhere.
KANGAS: So what is your advice for investors when dealing with fee waivers?
ZWEIG: Well, the first thing is make sure you read the funds documents carefully, whether you're getting them online or on paper. Watch for the asterisk. Watch for a statement like "fund expenses before reduction," which tells you what they're really going to charge you when the waiver expires.
KANGAS: Right.
ZWEIG: And as a general rule, you should be able to get a good money market fund for well under half of a percent of your assets per year. If it's charging more than half a percent, with or without the waiver, it's probably not a good deal in the long run.
KANGAS: OK. And when one waiver expires, go into a fund that has one just starting in other words, right?
ZWEIG: Well, you certainly can do that. There are people who shop these things the same way people do like frequent flyer miles. But.
KANGAS: Very interesting and useful information once again, Jason. Thanks for joining us.
ZWEIG: Thanks, Paul. My pleasure.
KANGAS: My guest, Jason Zweig, investing columnist for Money magazine.
