Are money markets really as low risk of an investment as it seems?

by chak2005

Money market funds are reasonably expected to protect the value of nominal principal. They are not FDIC insured and can loose money. However, scenarios in which they loose money would probably be major scandals – of the kind that could bring down whatever fund company offered the money market. “Breaking the buck” is not something that a money market takes lightly. There are far more things in life to worry about than this risk.

Even during the ’08 crisis, I believe only one fund (The Reserve Primary Fund) actually broke the buck.

What happened to Reserve Primary presumably couldn’t happen again in the same way, because of money market reform regulations. In Reserve Primary, due to the fund’s holding shaky Lehman Brothers securities, fund investors doubted that the value of the fund’s assets was really $1/share, precipitating a “run” on the fund. Currently, “retail” money market funds continue to maintain the $1/share NAV but can only be bought by “natural persons,” while institutions can only buy institutional money market funds in which the NAV floats based on the market value of the fund’s assets, just as in other mutual funds. The result is that if, today, a money market fund held assets whose value fell, the NAV of the fund would fall, too. The big institutional investors would not be happy but wouldn’t feel that they needed to make a run on the fund.

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Overall before high yield savings, MM funds were the place to store cash. After the ’08 crisis they fell out of favor due to low interest rates, however they’ve recently made a comeback. With all things, my advice is if you want to use them as a means to juice interest on your money, do it (I do), however make sure you look at what the fund invests in.

 

Disclaimer: Consult your financial professional before making any investment decision.

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