Ask Money

Tax exempt money market mutual funds

Chris Farrell Sep 22, 2008

Question: I have a municipal mm mutual fund with Fidelity. It is spread across all 50 states. The prospectus shows that for instance Lehman is the “liquidity facility” sometimes Bof A is mentioned or Morgan or JP Morgan Chase. What does that mean about the safety of this mm fund? Susan, Irvine, CA.

Answer: Right now, money market mutual funds are among the safest parking places for cash available. That’s because the U.S. Treasury has decided that the American taxpayer backstops the business. The details are still being worked out, but the guarantee is that any publically traded money market mutual funds won’t “break-a-buck,” the financial pledge that at a minimum the dollar you’ve invested in a fund will be worth at least a dollar tomorrow. Funds will pay a fee to participate in the program, and the insurance plan has been funded with up to $50 billion. It only includes money invested before Sept. 19.

The Treasury has also clarified that the insurance pledge includes tax exempt money market funds. So, your very short-term fund has the protection of diversification (across all 50 states), the financial soundness of Fidelity and the Treasury’s insurance guarantee.

The Federal Reserve has also adopted several rules to make sure that there is sufficient liquidity in the market. (More liquidity means it is easy to buy and sell assets at their fair market value, and less liquidity means it gets harder to buy and sell.)

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