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Are Money Market Mutual Funds Safe?

Are Money Market Mutual Funds Safe?

Money Market mutual funds are an extremely popular investment vehicle for holding investor’s cash investments. The wide majority of mutual fund investors have a money market mutual fund. They are perceived as being safe and very liquid, even though the interest earned may not be stellar.

Money Market Mutual Funds vs. Bank Savings Accounts

There are a number of technical differences between money market mutual funds and bank savings accounts. The most important difference to investors and/or retirees is the application of FDIC insurance. Bank savings accounts are covered for up to $250,000 of deposits should the bank fail. Money market mutual funds are not covered under FDIC insurance. This single fact causes many people to put all their assets in bank savings accounts and CDs. This fact also causes other people to ponder if their money market mutual funds are safe.

The Money Market Mutual Fund Positives

Anyone who invests in stock, bond, or other mutual funds uses a money market mutual fund to hold the cash portion of their investment portfolio. Money can be moved in and out of the fund at the standard $1.00 NAV. Rates of return on these funds are similar, and normally a bit lower than bank savings accounts. However, the rates are not so different as to make rates of return a major factor in deciding to invest in these funds or a bank savings account.

The investments in money market mutual funds are very short term in duration so to meet the rapidly changing withdrawal needs of the shareholders. The investments are also conservative to ensure the assets will not lose value.

Can an Investor Lose Money in a Money Market Mutual Fund?

In a word – Yes. If such a fund takes more than normal risk with the assets in an attempt to increase yield, the fund at some point could be in a position of not being able to meet the fund’s withdrawal needs. This is an extremely rare event.

The bigger issue facing shareholders is during times of extreme financial crisis, such as in 2008. During that year, the financial system came to near collapse, sparked by the failure of Lehman Brothers. This company issued a huge amount of short term investments, and many money market mutual funds held the Lehman investments in the their funds. Since Lehman defaulted on its obligations, the money market funds had to show a loss. Many funds were in danger of “Breaking the Buck” which means declaring the NAV as being worth less than $1.00.

In fact, only one money market mutual fund Broke the Buck in 2008. What is not very publicized is that over 20 other money market mutual funds were bailed out by the sponsoring Mutual Fund Family, such as the Evergreen Funds owned by Wachovia Bank. These sponsors essentially deposited cash into the funds to make them whole. Why would the fund sponsors do this?

Mutual companies have long known that their success has depended upon much more than investment performance and good customer service. The primary ingredient is the trust of the shareholders. Should a fund family lose the trust of the shareholders at any time, these investors will simply withdraw all their assets and invest elsewhere. Breaking the Buck on a money market mutual fund is severe breach of that trust. All 20 companies mentioned above made the funds whole in order to keep their shareholders and thus, stay in business.

Do Investors Need to Worry About the Funds?

During normal course of business, shareholders can be relatively comfortable that their money market mutual fund is safe. They should bear in mind that a major world or market event could cause another financial crisis. This would then bring the money market funds to the forefront again with the issue of stability.

Should these investors want the maximum protection in a money market fund, they should invest their money only in funds that invest in US Treasury Securities. These securities are considered riskless by the investment community, even though they could technically default.

There is no reason not to use US Treasury money market funds for cash investments. Investors can sleep at night knowing their assets are safe.

 

 

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