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The Money Management Newsletter: GICs and Fixed Income
New twist to convertible GICs - Buy Mutual Funds; write cheques

Over the past several years competition in the mutual fund industry has largely been based on companies adding new and often more exotic types of funds to their families or marketing "star" managers.

Recent months however have seen the introduction of new products within the industry as well as enhancements on some existing products that will provide investors with more variety. One new product is a GIC that is convertible to a mutual fund prior to maturity while improved products include free chequing on money market funds and "no-lose" investment funds.

The convertible GIC is offered by Trimark Trust which was formed when Trimark Financial Corp. purchased Bayshore Trust. These GICs will be available for purchase on September 29th, 1997 with the main benefits being higher rates than the big 5 banks and Canada Trust and a feature that will allow the holder to convert them to a Trimark mutual fund after half of the selected term has expired. The GICs can initially be purchased for either one, three or five years and can be converted after 6, 18 or 30 months respectively. Investors therefore that are uncertain about stock markets can place their money in one or more terms of these GICs, earn better than savings rates and have the flexibility of breaking the GIC without penalty and getting into the market during a downturn. The mutual fund purchased however must be one of Trimark's backend load funds so the investor's funds can not be withdrawn for six years without incurring a redemption penalty. In effect a one year GIC purchase if converted can become subject to a redemption fee for 6 years after conversion so the investor has to be certain that he/she wants to enter the market for the long term but earn a good rate on his/her money while trying to time market entry.

Chequing privileges on money market funds is not a new concept as a few mutual fund companies and National Trust and Royal Trust have offered it on a restricted basis or with a fee. Free chequing has now been introduced by Trimark on the Trimark Interest Fund which is a money market fund. This article is not intended to be an advertisement for Trimark it's just that they are the first to offer these products. Trimark will issue free cheques to clients who request this privilege and cheques can be written without a service charge. For each cheque written the client will receive a confirmation which includes the cheque number, the date it cleared and the remaining balance of the account. Cheques will however have to be for a minimum of $1,000.00 and while there will be a stop payment provision there will not be any overdraft protection. For depositors who keep large balances in savings accounts using any money market fund with a chequing privilege is a much better option. Daily interest savings account rates at most of the major banks was .25% at the time of writing and 1.0% at Canada Trust. Money market funds however were averaging around 2.75% (11 times better than bank daily interest rates) and chequing privileges provide immediate access to funds for effective cash management.

Another mutual fund company, C.I. Mutual Funds, announced on September 17th that they will offer a selection of "no-lose" funds. They will actually be segregated funds similar to what many life insurance companies issue and C.I. will be renting a life insurance company's charter in order to sell them. Like most segregated funds they will guarantee return of invested capital after 10 years or upon death which may be important in the estate planning of seniors. C.I. will be marketing these funds under their own banner rather than just managing money for a life company which is important to C.I. as it will enhance their own product line.

We can expect to see more wrinkles added to the product lines of mutual funds companies as they try to improve their market share.

 

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