With more bad news likely to come out of the world credit crisis, there will be further shocks to stock and bond markets. Many clients will want to wait out the volatility on the sidelines by keeping a chunk of their portfolios in cash. The question is: where should they park their money until they determine the time is ripe for a return to the markets?

Today, the range of short-term instruments for holding cash is vast. “You can put your money into the familiar stuff, such as savings accounts and Canada Savings Bonds,” says Derek Moran, a registered financial planner and president of Smarter Financial Planning Ltd. in Kelowna, B.C. “But sometimes you find that the most familiar vehicles pay less than ones that are less familiar, such as online premium-interest savings accounts and high minimum-balance money market funds. The thing is: you have to shop the market to get a deal.”

Shopping requires that clients evaluate return, liquidity, convenience and, most important, risk. All of these factors must be kept in mind to avoid having a small boost in yield turn into a disaster.

That’s the lesson of the collapse of the market for asset-backed commercial paper, which are short-term obligations backed by credit card receivables, car lease payments and other accounts receivable. The attraction is that they pay better than government-backed Treasury bills. But investors who went for the brass ring of yield to capture 0.5% of extra return have found themselves suffering losses that can’t even be measured accurately because the ABCP market is not trading. Clearly, short-term investing is about more than yield.

The basic short-term investment is the defined by the Bank of Canada in the form of T-bills. But there are also bankers’ acceptances, high minimum-balance money market funds, deposits insured by Canada Deposit Insurance Corp. at chartered banks and trust and loan companies, and deposits insured via the credit union centrals.

As well, there are cash accounts at various investment dealers, Canada Savings Bonds and, of course, chartered banks’ guaranteed income certificates with maturities longer than one year and, different in name only, term deposits that generally run less than a year.

Here’s a look at some of the choices for parking short-term cash. (All rates quoted as of Dec. 11.)

> Treasury Bills are short-term notes issued by the Bank of Canada and due in 365 days or less. They are sold as discounted instruments by investment dealers. For example, recently a client would pay $9,904.35 for a bill with a face value of $10,000 that matures in 93 days. The difference — $95.65 — works out to be 3.75% of the purchase price.

The discount tends to increase with the amount invested. Minimum orders are $10,000 in most cases, although dealers will often sell multiples of a few thousand dollars to existing clients. T-bills can be sold at any time prior to maturity at the prevailing discount adjusted for the profit that each dealer builds into every trade.

> Bankers Acceptances are IOUs issued by the chartered banks. They rank as senior debt obligations and, like T-bills, are sold on a discounted basis and are typically due in less than a year.

BAs usually boost T-bill yields by 10 or 20 basis points. However, in the present market mood of hysteria over the potential hits banks may have to take as they write off their losses on ABCP and exposure to U.S. subprime loans, BAs are paying 50 to 80 bps over T-bills, down from 120 bps when the credit crisis hit Canada in mid-August.

The risk of banks defaulting on their BAs is negligible, for any bank that did not refund the BAs on time would be a pariah in world debt markets, says Edward Jong, vice president of fixed-income at Majorica Asset Management Corp. in Toronto.

Risk-averse investors may continue to prefer T-bills, but BAs represent a substantial boost in return for what most market-watchers say is a slight additional risk. The BA market tends to be liquid; BAs can be sold prior to maturity at an adjusted discount level that reflects both interest rates and market conditions.

> Money Market Mutual Funds allow investors access to sophisticated debt markets through the management of sponsoring companies. However, management fees can take a hefty chunk of returns. The median management fee for Canadian money market funds was 1.09% as of Oct. 31, 2007, which represents a third to a quarter of the gross returns of the funds — roughly 3.4%. As the amount of money under management rises, fees tend to decline and net returns to rise.

@page_break@The general rule is that to get the best rates, clients must use high minimum-balance accounts. For example, $1 million invested in MB Money Market Fund, sponsored by Toronto-based McLean Budden Ltd. , produced a 4.5% return for the 12 months ended Oct. 31. Another MB money market fund, holding the required $10,000 minimum investment, returned 3.9% in the same period.

> Term Accounts at deposit-taking institutions have widely variable returns on short-term deposits. For example, in early December some of the best rates for six-month deposits were at ICICI Bank Canada, paying 4.25% for 30 to 59 days on a $5,000 minimum deposit, and at Pacific & Western Bank, which paid 4.43% on a $5,000 minimum deposit.

These institutions are members of the CDIC, which covers accounts of up to $100,000 a person. Virtually all deposit-taking institutions have some form of account insurance. CDIC insurance rules and a list of member institutions can be found at www.cdic.ca.

Rules for early encashment of term deposits and rates need to be compared carefully. Some deposits are locked in, while others may be cashed at penalty rates. Still others allow encashment with the provision that there is no interest for the first 30 days, after which interest is paid on a pro-rated basis for the time the deposit was maintained. A survey of institutions and products can be found at www.fiscalagents.com, which is operated by Fiscal Agents Financial Services Group of Oakville, Ont.

> High-Interest Online Savings Accounts offered by major chartered banks compete with savings accounts of both bricks-and-mortar branches and virtual banks that operate without extensive branch networks.

For example, Royal Bank of Canada’s online savings accounts pay a floating rate of 4% in order to compete with similar accounts from virtual banks. INGDirect, a virtual player, pays 3.75% on its investment savings accounts. On these accounts, there are no minimum balances required and interest is calculated daily and paid monthly.

Online accounts at some banks pay higher rates than saving vehicles offered at their branches. If your client does not need the convenience of a branch, there is no need to pay for it through deeply reduced returns, says Moran.

“It is odd that if the customer bears the cost of driving or even walking to a branch,” he says, “he or she is paid less than the customer who sits and banks online.”

Other financial services companies offer high-interest accounts. Altamira Investment Services Inc. of Toronto, a subsidiary of National Bank of Canada, has the Altamira High-Interest CashPerformer. In early December, it was paying 4.15% a year for Canadian-dollar accounts and 4.25% for U.S.-dollar accounts.

> Canada Savings Bonds, a fixture in the retail fixed-income market, have lived on as successors to war bonds sold in both world wars, says Caroline Nalbantoglu, a financial planner with PWL Advisors Inc. in Montreal.

“Canadians learned to loan money to the Government of Canada,” she says, “and this faith in lending money to the government via CSBs continues today.”

The latest CSB will be Series 110, issued on Jan. 1 at 3.1% for the first year and subject to annual interest rate changes for 10 years.

The basic CSB can be redeemed at any time. Premium CSBs in Series 60, issued on Jan. 1, will pay 3.15% for Year 1, 3.20% for Year 2 and 3.25% for Year 3 out of the 10 years. Premium CSBs are cashable only in the anniversary of the bond, such as Jan. 1, plus the next 30 days. The virtue of CSBs is their convenience and the ease with which they can be replaced by the Bank of Canada if they are lost. IE