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The Canadian Foundation for Advancement of Investor Rights (or FAIR) has issued an interesting report on money market funds. Canadians have invested $56-billion in these funds, which hold short-term fixed income products, and the funds have been sucking wind recently.

In fact, after you account for fees, the returns on these funds are so low that many investors are actually losing money on their investments. While it isn't unusual to lose money on equity mutual fund holdings or bond holdings due to the gyrations of the market, it is very unusual to lose money on money market funds. That's why they're often seen as ideal places to park money while you wait for better investment opportunities.



The math certainly doesn't look good. With the Bank of Canada holding its key interest rate at 0.25 per cent, the yield on short-term government bills is also very low. Meanwhile, the average fee on a money market fund is 0.99 per cent. FAIR found that the average Canadian money market fund returned a return of just 0.02 per cent, after costs, in the second half of 2009. A fund costing slightly higher-than-average tipped you into the red.

"Few individual investors are aware that MMFs are now producing zero or even negative returns or that many bank savings accounts can produce better returns," said Ermanno Pascutto, the executive director of FAIR, in a release. "Canadians are missing out on potential interest income of $300 to $500-million by not shifting their funds into higher-yielding premium savings accounts."

He goes on: "Financial firms and advisors should be informing clients of current returns on MMFs and alternatives to the current zero returns. Monthly statements should disclose the current interest paid on MMFs."

It's a good point, and I do suspect the news will come as a shock to many investors who had been relying on their money markets funds to generate the closest thing to a sure return. And if the report helps to drive down some of the absurdly high fees on these funds, then it will have served a fine purpose.

Still, FAIR's report is hardly surprising. Many observers have been concerned that the ultra-low interest rates in most parts of the world have driven down the rates of return on cash and near-cash to such low levels that investors have been pushed into taking on too much risk in an attempt to generate higher returns.

Leaving money market funds for a high-yielding bank account - which is only good if you're dealing with money outside your registered retirement savings account - is a good alternative. But diving into the stock market or bond market isn't necessarily the best solution if your primary goal is preserving your capital as you await a better time to invest.

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