Back to money funds
Cash is king in times like these, so it’s a good idea to have some in your RRSP. Over the past couple of years, I have advised putting using high-interest savings accounts such as those offered by Altamira and Manulife Bank rather than money market mutual funds for this purpose. However, the dynamics have changed and so should the strategy.
High-interest accounts react immediately to interest rate changes. So when the Bank of Canada cut its key rate by a quarter-point in January, virtually all savings accounts followed suit with their posted rates.
I believe that more interest rate cuts are likely, for several reasons. Canadian inflation is showing signs of easing. While former Bank of Canada Governor David Dodge (who stepped down at the end of January) says a recession in this country is unlikely, there is certainly an economic slowdown under way with the impact being felt most severely in central Canada. In the U.S., where recession fears are more acute, additional cuts from the Federal Reserve Board seem likely. Unless the Bank of Canada follows suit, more international money will flow to the loonie, driving its value higher. That is not an outcome our politicians, or our central bankers, want to see.
So at this stage it appears likely that short-term rates will continue to ease and that means your returns from high-interest accounts will steadily decline. The same thing will happen with money market funds but the process there is more gradual. These funds can hold securities with maturities as far out as one year, so it takes time for rate cuts to take hold.
When selecting a money fund, focus on no-load entries or front-end load funds you can buy with zero commission. Never buy a money fund on a DSC (deferred sales charge) basis. One of the major advantages of money funds is the ability to move in and out quickly. DSC units lock you in.
The MER (management expense ratio) is another important consideration. Never choose a money fund with an MER above 0.9 per cent. If you can find one below 0.7 per cent, all the better. Here are a few that meet the test: Altamira T-Bill Fund, Beutel Goodman Money Market Fund, Leith Wheeler Money Market Fund, Mackenzie Sentinel Cash Management Fund, McLean Budden Money Market Fund, Middlefield Money Market Fund, Phillips, Hager & North Canadian Money Market Fund, Saxon Money Market Fund, SEI Money Market Fund, and Sentry Select Money Market Fund. As you can see, there are plenty of options.