Dale Jackson

Personal Finance Columnist, Payback Time

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If cash was ever king, the crown has fallen on hard times.

Investors who stay true to the rule of keeping a portion of their portfolio in cash could find their meagre returns are being nibbled away by fees and taxes. In Germany, where interest rates have dipped below zero, retailers can’t stock home safes over consumers’ fears that it could soon cost money to save.

It’s not that bad here in Canada – just yet. You can still find a no-fee, high interest savings account that pays out 1.5 per cent, and put it in a tax free savings account (TFSA) to avoid being taxed.

Paying to save

But investors with mutual fund portfolios could actually be paying to save. Advisors will often put the cash portion in a money market fund, which invests in short-term debt securities and commercial paper. They are often regarded as being as safe as bank deposits.

Some investors also bulk up their cash positions in money market funds waiting for opportunities when markets are volatile, or when bonds finally start paying out.

Interest rates and bond yields were never intended to be this low for this long. But in the wake of the 2008 global financial meltdown, central banks insist borrowing rates must remain low in this long, fragile economic recovery.

As the days turned to years, money market funds sunk in the mud. The average Canadian money market fund has returned a paltry 0.3 per cent each year for the past five years.

That’s much lower than the 0.83 per cent return for the benchmark 91 Day T-Bill Index. The discrepancy can be attributed to the annual fee, or management expense ratio (MER), imposed by the mutual fund company. Fees range from 0.12 per cent to 1.89 per cent annually.

In many cases the fee has outstripped the return, leaving the investor with less money. If that’s the case it’s time to overthrow the king.

Dale Jackson is BNN's Personal Investor. Follow him on Twitter @DaleJacksonPI