by Kathleen Winkler

Created on: March 11, 2010

How safe are money market mutual fund investments for 2010?

 “Like money in the bank?”

In the wake of the recent crisis, banks don’t sound so safe anymore. Money market mutual funds also used to be thought of as safe investments until September 16, 2008, when the Reserve Primary Fund, one of the nation’s largest money market funds, announced that the net asset value of its shares had “broken the buck,” falling to $0.97 per share. For years investors had all but ignored the fund industry’s standard hedge clause that stated, although the fund seeks to preserve the value of its shares at $1, there is no guarantee that they will be able to do so.

Industry regulations require money market mutual funds to maintain an average maturity of less than 90 days. This short time frame helps the funds keep their prices stable because investments with longer maturities face a greater likelihood that something could go wrong. Typical money market fund investments include U.S. Treasury securities backed by the “full faith and credit” of the U.S. government, sort-term corporate bonds (“commercial paper”) and Certificates of Deposit (CDs).

Although money market funds generally have had higher yields, until September of 2008 only bank deposits were government insured. Then the Treasury Department stepped forward with a guarantee program that would be triggered if a participating money market fund’s net asset value fell below $0.995 per share. The guarantee was designed to help stabilize these funds, but it was not automatic or free. The funds had to pay to participate in the program, which expired September 18, 1909. By that time the worst of the financial crisis appeared to be over. During the year it was in place, no money market funds “broke the buck” and the Treasury Department collected $1.2 billion in fees from participating funds.

What about money fund yields?

As the Treasury Department rushed to stabilize values, inflation rates dropped along with the overall pace of the U.S. economy. Many consumers cheered when the Federal Reserve Board let interest rates fall to historic lows, but yields on bonds also fell. As yields on many money market funds dropped to zero, many large fund families waived their management fees in order to lift their money fund's yield up off the basement floor.

A variety of factors determine a money market fund’s yield. One is maturity. Longer-term bonds

• 1
• 2
• Next Page >>