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What’s Inside a Money Market Fund?

By Brian O’Connell
You may not realize it, but money market funds aren’t the same as bank money market accounts.

Category Product: 
Money Market
Category Finance: 
Personal Finance
Keywords: 
Money Market Bank Accounts, Money Market Funds, Mutual Funds, Investments, Investing, Investors, Stock Market, Equities, Finance
Introduction: 

By Brian O’Connell
You may not realize it, but money market funds aren’t the same as bank money market accounts.

Here’s how they differ:

Money market accounts: Bank money market accounts are essentially deposit accounts (think a checking account on steroids). And, like a checking or savings vehicle, money market accounts are FDIC insured.

Money market funds: A money market fund, on the other hand, is basically a mutual fund, albeit a lower-risk one than some of the fund industry’s more aggressive cousins. But lower-risk or not, money market mutual funds are not FDIC insured, and your principal investment is not guaranteed.

Some people found that out the hard way. Money market fund investors at Reserve Management shocked investors last year when it said that its main money market fund, called the Primary Fund, was worth less than $1 per share (at .97 cents per share). That meant fund investors who wanted to redeem their fund shares would only get 97 cents, and not $1.00, on their investment, thus losing 3% of their principal investment. Wall Street types call that “breaking the buck”.

The Reserve Management situation triggered a bout of anxiety among investors who wondered what investment vehicles actually comprised their money market funds. Investors who thought that money market funds represented an ideal “safe haven” investment during an extremely volatile economic and investment environment, found the Reserve Management situation a shocking one.

By and large, most money market funds invest in low-risk securities like U.S. Treasuries, CDs, commercial paper, and other relatively safe short-term debt-based financial vehicles. To find what’s in your money market funds, read the fund’s prospectus and/or check out the fund’s specific information on the company’s web site. Or, reach out and call the fund company directly and ask about the credit worthiness of the fund’s investments.

You can also move your money into a money market fund that includes only government-backed securities like U.S. Treasuries. You may get dinged on the yield, but your money will be safer with a Treasuries-only fund.

Make no mistake, safety counts. According to the Investment Company Institute (ICI), investors have over $3.6 trillion in U.S. money market mutual funds. For that amount of money, you can’t blame an investor who wants to know exactly what’s in their money market fund, and whether a piece of that fund’s investments has the capability of “breaking the buck” yet again.

—For more ways to save, spend, invest and borrow, visit MainStreet.com.

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Here’s how they differ:

Money market accounts: Bank money market accounts are essentially deposit accounts (think a checking account on steroids). And, like a checking or savings vehicle, money market accounts are FDIC insured.

Money market funds: A money market fund, on the other hand, is basically a mutual fund, albeit a lower-risk one than some of the fund industry’s more aggressive cousins. But lower-risk or not, money market mutual funds are not FDIC insured, and your principal investment is not guaranteed.

Some people found that out the hard way. Money market fund investors at Reserve Management shocked investors last year when it said that its main money market fund, called the Primary Fund, was worth less than $1 per share (at .97 cents per share). That meant fund investors who wanted to redeem their fund shares would only get 97 cents, and not $1.00, on their investment, thus losing 3% of their principal investment. Wall Street types call that “breaking the buck”.

The Reserve Management situation triggered a bout of anxiety among investors who wondered what investment vehicles actually comprised their money market funds. Investors who thought that money market funds represented an ideal “safe haven” investment during an extremely volatile economic and investment environment, found the Reserve Management situation a shocking one.

By and large, most money market funds invest in low-risk securities like U.S. Treasuries, CDs, commercial paper, and other relatively safe short-term debt-based financial vehicles. To find what’s in your money market funds, read the fund’s prospectus and/or check out the fund’s specific information on the company’s web site. Or, reach out and call the fund company directly and ask about the credit worthiness of the fund’s investments.

You can also move your money into a money market fund that includes only government-backed securities like U.S. Treasuries. You may get dinged on the yield, but your money will be safer with a Treasuries-only fund.

Make no mistake, safety counts. According to the Investment Company Institute (ICI), investors have over $3.6 trillion in U.S. money market mutual funds. For that amount of money, you can’t blame an investor who wants to know exactly what’s in their money market fund, and whether a piece of that fund’s investments has the capability of “breaking the buck” yet again.

—For more ways to save, spend, invest and borrow, visit MainStreet.com.

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