Money Market Funds in the News

When it comes to finding safe places to put your money, money market funds typically rank right up there as one of the safest investments available. After all, they are designed to maintain a $1 per share price and pay interest. While almost all money market funds do live up to their expectations, we saw last week that there are still risks that can be associated with money market funds.

Earlier last week the Reserve Primary Fund “broke the buck,” which means the share price dipped below the $1 standard. This is only the second time in the nearly 40 year history of money market funds that this has happened. This occurred because the fund suffered losses in the Lehman debt it owned, which forced the share price to dip slightly.

The Government Steps In

When word spread that the Reserve Primary Fund was in trouble, investors flocked to pull their money out of money market funds. This run on funds is not good for the fund companies or investors, so the Treasury stepped an announced a temporary program that would protect some money market funds and their investors from losing money. This applies primarily to funds investing in the safest assets, such as Treasury securities.

In the past, money market funds were not insured like bank accounts. Bank deposits are insured by FDIC, so if your bank fails, your money is protected. Money market funds are more like investments, and were not covered by FDIC, so your money would be at risk. For a limited time, some funds will not be protected by this measure taken by the Treasury.

Reconsider the Role of Money Market Funds in Your Financial Plan

Money markets always have, and always will have a place in most portfolios. They are still the cash-equivalents that reside in many brokerage and retirement accounts that are used to temporarily hold money until it is needed to make another investment purchase. The key with any investment is to gauge how much risk you’re willing to take for the desired return. Money market fund yields are based on risk, and the higher the yield, the greater the likelihood that the fund is invested in riskier debt.

So, make sure you understand what role your money market accounts play, and only take on as much risk as you’re willing to take. This was a very unique and rare situation, so your money will likely remain perfectly safe in any money market fund, but just be sure you know what your fund is invested in, and make changes if appropriate.