Investing: Shop for higher interest rates

The July sales figures released recently by the Investment Funds Institute of Canada (IFIC) clearly illustrate how frightened some investors have become.

The association for the mutual funds industry reported estimated net redemptions of $1.1 billion in July.

That was down just slightly from the $1.2 billion pulled out in June, making this the worst two-month slump since 1998.

Looking for liquidity
It’s not surprising that some people are giving up on equity funds in the face of on-going market turbulence and a daily diet of new reports of scandals and bankruptcies.

What was more of a surprise was the broad retreat from money market funds, the safe havens of the mutual fund world.

Presumably, this money is going into GICs, savings accounts, or even under the mattress.

But does this approach make sense? Actually, it does—if you can find an acceptable alternative for the cash.

Money market returns
The average Canadian money market fund returned 1.9 per cent over the year to July 31, with virtually no risk.

The average U.S. money market fund came in slightly lower, at 1.8 per ce, not including any currency exchange gains or losses.

Yields on Canadian MMFs may rise slightly over the next 12 months, thanks to the Bank of Canada’s recent rate hikes, but not by a lot.

U.S. money funds are unlikely to do much better because of the Fed’s stand-pat approach to rates in the face of weaker than expected growth in that country. In fact, the Fed indicated a bias towards future easing after its August meeting.

This could mean even lower returns from U.S. dollar MMFs in the months ahead. Of course, U.S. money funds are a way to protect assets against a possible drop in the value of the loonie, but there are other ways to achieve that.

Next page: Bank rates microscopic


Bank rates microscopic
So the retreat from money market funds makes sense, providing you can find better alternatives. In most cases, a bank account is not one of them. The rates at the major banks are microscopic.

However, some smaller banks, credit unions, and trust companies offer higher interest savings accounts where your money will earn more than in an MMF.

Recently, ING Direct was paying 2.75 per cent on its Investment Savings Account. That rate is subject to change, of course, but so are MMF yields.

However, if you want to put your money into a U.S. dollar account, ING Direct will only pay 1.5 per cent. Details at

Loss leader rate
Interestingly, if you go to the U.S. ING site at you’ll find that you can open an Orange Savings Account in that country that pays 2.75 per cent on your U.S. cash.

That’s a loss-leader rate, a marketing expense to build U.S. business. It’s working. ING is growing rapidly south of the border.

However, you can’t benefit from the offer unless you have a U.S. social security number.

Many U.S. financial institutions will allow Canadians to open accounts with them by supplying a social insurance number. But ING U.S. isn’t among them, saying a social security number is required for identification purposes, since their business is mainly done on-line or over the phone.

Investigate Treasury bills
Another alternative to Canadian MMFs is to invest directly in Treasury bills through a brokerage firm. The yields will vary depending on the term chosen and the amount invested, but they’re higher than money market funds are producing right now.

RBC Dominion Securities was recently quoting yields of 2.11 per cent on 60-day bills for a $30,000 investment.

For 120 days, with a $10,000 minimum, they offered 2.486 per cent. The one-year rate was 2.853 per cent.

However, their yields on U.S. T-bills were a different story. The highest they had was 1.22 per cent for 139 days, with a US$25,000 minimum. That’s certainly not the way to go.

GICs bad choice
Short-term GICs at a major bank are a bad choice. At Royal Bank, for example, an investment of between $5,000 and $100,000 recently earned just 1 per cent for up to six months and 1.25 per cent for between six months and a year.

Even if you have more than $1 million to put in, they won’t pay you more than 1.4 per cent for six months or 1.65 per cent for a year. And those are non-redeemable GICs. At least with money market funds, you can cash out at any time.

Shop around
If you want to go the short-term GIC route, you’ll do better by shopping some of the smaller financial institutions. For example, People’s Trust was recently paying 2.25 per cent on 30-day GICs, with a minimum deposit of $5,000. The one-year rate was 2.55 per cent.

The company has branches in Vancouver, Calgary, and Toronto and is a member of the Canada Deposit Insurance Corporation. For more details, visit their Web site at

Switch money funds
Here’s one more idea. Don’t pull your cash out of money market funds at all. Just switch to one that does better than the average, usually because of a low MER.

Altamira T-bill Fund is a readily accessible no-load choice. It has an MER of just 0.39 per cent and returned 2.6 per cent in the year to July 31.

Adapted from an article that originally appeared in the Internet Wealth Builder.