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Unsafe at any investment grade

A reader wonders if he's tempting fate with a money-market look-alike. Money Magazine's Answer Guy sets him straight.

By George Mannes, Money Magazine senior writer

NEW YORK (Money) -- Question: Half my cash is in a money-market account with Ford Interest Advantage, which yields up to 6.07 percent. Is this a safe investment? Can I lose my money because it isn't FDIC-insured? -Michael Bilo, Clermont, Fla.

Answer: Danger! Danger! Yes, you can lose your money, and the lack of federal deposit insurance is only part of the peril.

The screaming problem here is that Ford Interest Advantage, offered by a subsidiary of Ford (Charts, Fortune 500), isn't a money-market account or fund. Sure, it looks like one: You can easily move money in and out, and you get higher interest than you would from a basic savings account.

But money-market funds, if not FDIC-insured, at least hold a safe, diversified mix of short-term investments (such as certificates of deposit). Ford Interest Advantage, in contrast, is an undiversified investment in the debt of a single issuer: Ford Motor Credit.

And risky it is. Standard & Poor's rates Ford Credit's debt as "B" - solidly junk. A bankruptcy filing by its parent (which lost $12.6 billion last year) would likely leave you and a lot of other Ford Credit lenders lining up to get your money back.

No wonder, then, that the SEC slammed Ford Credit in 2005 for calling this product "Ford Money Market Account." It's just another reminder that any time you're promised above-average yield, you have to ask, "What's the catch?"

Question: Since mutual fund expense ratios are in effect management fees, it seems they should be tax-deductible, just the way a financial adviser's fees are. But if funds don't report what fees they've charged, how can I deduct them? - Mel Epps, Lafayette, Calif.

Answer: Short answer for why you can't deduct mutual fund management fees on your tax return: The Internal Revenue Service says you can't.

IRS Publication 550, "Investment Income and Expenses" (find it online at irs.gov) forbids deductions for investment expenses incurred by publicly traded mutual funds.

The basic idea is that the fees were never actually passed along to you but were netted out of your dividends before you received them. You can't deduct expenses from income you never got - and thus were never in danger of paying taxes on.

Look at it another way. Let's say that mutual funds didn't deduct management fees, but sent you a separate bill instead. You'd be worse off, because IRS rules dictate that you'd be able to deduct only the share of investment expenses (and certain other items) that exceeds 2 percent of your adjusted gross income.

So don't sweat it: You're getting an okay deal. Top of page

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Are munis a good deal?

Looking for some answers? Send us your questions about investing. E-mail answer_guy@moneymail.com.