How Safe Are Money Market Funds?
Question: In the past few years of following the financial news and your program, I've come to see the Money Market fund as a stable place for short-term emergency fund money. Very limited risk of loss of principle, and the very few times it has happened, investors got out with almost all of their money anyway.
Talking with a coworker recently, she said that she had experienced a money market fund dropping in value (presumably some 25-30 years ago). Was she just one of the unlucky ones or is the mantra of "only one money market fund failing" a story limited to the last 25 years? Adrian
Answer: Money market mutual funds, despite their billing, are not risk free. These funds are on the safe side of the risk spectrum because they invest in Treasury bills, short-term U.S. government agency securities, commercial paper certificates of deposit, and other very short-term debts. The security in the fund comes from diversification and the quality of the short-term debt the fund invests in.
There's the rub. In order to attract more money, some mutual fund companies take on riskier short-term debts to boost yields. And then the industry gets roiled by the risk that a money market mutual fund will "break a buck" during a market squall like now. In other words, the promise of a money market mutual fund is that if you put a dollar into it you will at minimum get a dollar back at withdrawal. As far as I am aware, the value of no major money market mutual fund has fallen so much that withdrawals have been worth less than a buck. However, I am aware that in some cases the parent company has injected cash into the money market mutual fund to preserve its value.
That's why I like money market mutual funds attached to a major brandname financial institution with the money to shore up a fund and a reputation to protect if there is a risk that the fund will break-a-buck. I also prefer lower yielding money market mutual funds composed primarily of U.S. Treasury securities and U.S. agency debt. I just don't think the risk of a slightly higher yield is worth it.