Q. Iam a senior citizen, and I have two CDs which come due thismonth. One is in trust for my granddaughter and while the other isnow in my name, I would like to put it in trust for my grandson.Should I renew these CDs or put them in mutual funds? I have twoaccounts with the AARP fund family, both invested in the AARP GNMAand US Treasury fund. Would you advise putting the CD money in thisfund?M.F., Canton
A. The AARP GNMA and US Treasury fund, which sports a generousyield and usually produces above-average total returns, is anexcellent holding for a senior citizen such as yourself. But intruth it's a pretty stodgy vehicle for young people, who probably areseeking growth of capital more than yield, and whose investment timeframe will probably be fairly long-term -- saving for college, a homedown payment, or even retirement. So why not consider the twogrowth-oriented funds within the AARP fund family.
The first of these two if AARP Capital Growth, a fund which isdubbed 'aggressive' by Morningstar Mutual Funds, and which hasdemonstrated its aggression by losing 10.89 percent of its valuebetween Jan. 1 and July 7. The fund, heavily committed to media andfinancial investments, is far from tame, and despite its risk-takingways has produced only an average long-term record. So if the giftmust please the giver, let's forget about that one.
But the AARP Growth and Income fund is another story, whichmight please both you and your grandchildren. Morningstar MutualFunds dubs this one 'an all-weather vehicle,' and it has demonstratedthis by producing a year-to-date gain of .76 percent through July 7-- a figure which looks terrific when you bear in mind that theaverage growth and income fund in Lipper's universe lost 2.72 percentin that period. Over the last five years, AARP Growth and Income hasproduced average annual gains of 11.43 percent.
Q. At ages 86 and 83, we are faced with investing the proceeds ofa $94,000 CD which matures in September. We would like the funds tobe easily available in case of illness, etc. Money market funds soundideal, but they are not paying as much as CDs. What can you sayabout money market funds and their advisability? Why do they pay somuch less than CDs? Do they pay dividends or capital gains likeother funds?G.M., Escondido, Calif.
A. Yes, with both the stock and bond markets going to hellhand-in-hand over the past four months, those humble money marketfunds are certainly beginning to look pretty attractive again. Withthe majority of money market funds now offering a seven-day yieldbetween 3.5 percent and 4 percent -- with quite a few higher -- theylook very good to investors who have been battered by the sour bondmarkets of this spring.
Basically, the reason that money market funds produce a loweryield than CDs is that they are shorter-term holdings. These funds'portfolios are typically invested in obligations such as commercialpaper (high-quality corporate IOUs) with an average maturity of about40 days. Most people view money market funds in one of threeways. They are frequently used as short-term repositories for fundsin transit, where they will rest for days or weeks and earn a modestreturn relative to the current market -- not much, but better thanrotting in a noninterest bearing bank account. Others use themdefensively -- as a haven for cash in times of market uncertainty,where the money can ride out the market storms in absolute safety.Finally, some investors -- and particularly retirees -- make it apractice to hold a percentage of their portfolio in cash as a hedgeagainst sour markets. Like mutual fund managers, they might fromtime to time alter the cash allocation, heavying up in uncertainmarkets and reducing the amount when they're bullish, but the accountalways has some percentage of their funds.
Are such strategies effective? Consider the results of theshortest-term corporate bond fund I know of -- the Strong Advantagefund. Morningstar reports this fund's average maturity at .3 years,but from Jan. 1 to July 7, its total return was but 1.18 -- less thanmoney market investors enjoyed in the same period.
