Yields of money-market funds and CDs are slipping in the United States, but double-digit yields are still being offered on short-term securities in some foreign countries. So, you may be considering a mutual fund invested in such foreign issues.
If so, it's probably a short-term world income fund. It is likely to pay more than a money-market fund and to be less volatile than a long-term bond fund.
According to Lipper Analytical Services, 43 short-term world income funds were in operation at the end of 1991 -- up from about a half-dozen at the end of 1989.
Reflecting their strong appeal, their assets topped $18.7 billion as of Sept. 30, more than triple the total from the year before.
Two fund sponsors accounted for more than two-thirds of those assets. Alliance had four (now five) funds, of which the oldest, the $6 billion Short-Term Multi-Market Trust, dates back only to May 1989. Merrill Lynch's Short-Term Global Income Fund had grown to $6.3 billion in less than 15 months.
Such growth is impressive, to be sure -- even at a time of rapid growth in the mutual fund industry.
But does their popularity mean that a short-term world income fund would be the best way to raise your income? Not necessarily. It depends on the fund and on a comparison with the alternatives, such as short-term, investment-grade bond funds, which are invested in U.S. government and corporate securities.
In 1991, according to Lipper, average yields of short-term world income funds were higher. But short-term, investment-grade bond funds had a higher average total return: 11.9 percent vs. 7.4 percent.
No one knows how their future performances may compare. But if you're tempted by short-term world income funds, be sure to understand both their risks and rewards.
You need first to be aware that the Lipper group consists of -- and its average performance data reflect -- at least three types of funds:
* Funds, such as those sponsored by Fidelity and Shearson, that are invested in single currencies.
* Funds, such as Huntington's International Currency Portfolios, that buy money-market instruments with maturities of up to one year.
* Funds with diversified portfolios consisting of money-markets and other securities that are denominated in a variety of currencies and whose average maturities commonly may range up to three years.
The last group, often known as multimarket or global funds, make up the majority. Their maturities are more comparable to other short-term bond funds. Therefore, they entail similarly low interest rate risk. They may be what you have in mind.
Because they are usually invested in government and high-grade corporate securities, credit quality shouldn't be a concern.
That leaves currency exchange rate risk: the risk that foreign currencies will fall vs. the U.S. dollar, reducing returns when translated into dollars. Funds may try to minimize this by various hedging techniques or by investing portions of their assets in U.S. dollar securities and in those denominated in Australian and Canadian dollars, whose volatility relative to our dollar is low.
When estimating your potential rewards, you should take costs into account. Most funds impose a sales load of up to 3 percent for purchases or a similar deferred sales load for redemptions. Some fund families, such as Alliance, Merrill Lynch, Prudential and Van Kampen Merritt, offer Class A and B shares, giving investors a choice between the two.
Moreover, most funds' annual expenses include the so-called 12b-1 distribution fees, which reduce yields and returns. These run about 1 percent for shares involving deferred sales loads and up to 0.3 percent for shares sold with front-end loads, giving a cost advantage to a "pure" no-load fund, such as Scudder's, which doesn't levy them.
To provide shareholders attractive returns after allowing for costs, portfolio managers must consistently demonstrate both skill and agility in their securities selection and currency hedging. In 1991, Jeffrey Brummette got Prudential Short-Term Global Income Fund off to a good start with a large position in three-year U.S. Treasury notes. The fund got an additional lift from high-yield issues of several countries, principal ly Britain and Spain.
Gordon K. Johns says it would be wrong for his Kemper Short-Term Global Income Fund to invest in the United States ("the lowest-yielding market in the world"). He attributes his 1991 performance in large part to being about 50 percent invested in Italy and Spain.