Money market funds, in general, are safe ways to gain interest, with in general, higher rates than savings accounts. Much like mutual funds, they have a share price, which is usually $1 per share. Money market funds are uninsured, though in the past they have always been safe. That is, unless something like the mortgage collapse and the "Great Recession" happens.
As long as the share price stays at $1, you're safe. But if it drops below $1, you will not get your full principal back. That, you can see, is a problem.
Money market funds are really mutual funds that invest in low-risk short-term investments that barely fluctuate in value. Just as with normal mutual funds, they recalculate their share price daily, but strive to keep the price at $1 / share. Any money made from the short-term investments is paid as dividends. Essentially, it seems like a savings account, but with no FDIC insurance and the "share price" difference.
Last year, a special government program was put in place three days after the Reserve Primary Fund became the second money market fund in history to fall below $1 per share. This was, in fact, the day after Lehman Bros. filed for bankruptcy. The Reserve fund had about 1 percent of its assets in Lehman debt, mainly short-term commercial paper.
The reason the Reserve Primary Fund, a $62 billion fund tanked was that many of its investors were institutions. When they began to take out money in droves, the fund dropped its price to $0.97 and halted redemptions.
The federal government, realizing how destabilizing it would be if a "run" on money market funds occurred, instituted a special program on Sept. 19th to guarantee the $1 / share price on MMFs.
That program ends Sept. 18th. It is, according to reports, unlikely to be renewed. However, to prevent a repeat of last year's run, the Securities and Exchange Commission (SEC) has proposed rules that it says would "increase the resilience of these funds to economic stresses and reduce the risks of runs."
The proposal would require MMFs to maintain a certain portion of their assets in securities that could be converted quickly into cash, for redemption purposes. Alternatively, of course, they could hold cash. Today there isn't such a requirement. MMFs would be required to hold shorter-term securities on average.
Some funds have already adopted the proposals, although they are just that: proposals. Should a private investor be concerned?
Realistically, no. In reality, however, there are plenty of online banking accounts that pay more than MMFs, and are FDIC insured, if you look hard enough. A good place to start is Bankrate.com.
I would recommend taking a look there, and comparing with MMFs. You might be surprised at how much you can get and still be FDIC insured.
Comment and add to the story without registration, but keep the comments meaningful please. Links are not accepted.
