Avoid a buck-breaking mutual fund

Marketplace Staff Jun 12, 2009

Avoid a buck-breaking mutual fund

Marketplace Staff Jun 12, 2009


Tess Vigeland: And now we turn to mutual funds of another sort. The kind that used to be the opposite of risky. Vanguard made some significant changes to three of its money market mutual funds in an effort to preserve some sort of return for investors.

Here to help explain is John Waggoner. He writes a column on mutual funds for USA Today. Welcome to the show.

John Waggoner: Thank you for having me.

Vigeland: Money market mutual funds have been in the news quite a bit over the last few months, because last fall, one of the big ones did what’s called “breaking the buck.” And this is something that’s supposed to happen with money market mutual funds. Remind us again what happened.

Waggoner: Sure. “Breaking the buck” is what they refer to technically as a “really bad thing.” Money funds are supposed to keep their share prices at $1 per share each day, every day. So it gives you the feeling that your share price won’t go up and down, like it would with, say, like a stock fund.

Vigeland: Right, you put a dollar in and you’re definitely going to get a dollar back.

Waggoner: Right, except of course, when you don’t, which is what happened with the Reserve fund.

Vigeland: So they broke the buck.

Waggoner: Yes they did.

Vigeland: Now with that as background, now we’re looking at the possibility of some of these money market mutual funds breaking the buck through really no fault of their own. Explain to us how this is happening.

Waggoner: Well, the problem is that interest rates are so low that many funds are having to eat their expenses. It costs them money to run a money market fund and the funds take a certain amount of cash off the top to run the fund. Right now, the average money fund is yielding 0.17 percent, which is next to nothing. The problem is some funds may not be able to continue eating those expenses.

Vigeland: But basically what the consumer is facing is that they’ve got such a low-interest rate in the first place and then you add onto that any fees that are imposed by the mutual fund company, even if they’re famous for being like, like Vanguard, and all of a sudden you’re at less than zero.

Waggoner: Well that’s right, technically. Unless the funds add this extra money in or stop taking money for expenses, there is the danger that they could break a buck. Low rates also present some other dangers though, that are probably more likely for a lot of funds. Most funds would probably liquidate the fund before they had to break a buck to take their own expenses.

Vigeland: So, if you’re a consumer looking at the money market mutual fund, is this still a viable place to put your money?

Waggoner: Well for most people, if all you want is just a short-term parking place, it’s OK. Most of the large funds are really self-insured, as it were, they’ll step up to the plate and replace things. What you do kind of worry about are the smaller funds, which rather than close down, might consider doing something silly to increase their yield, like buy things that are much longer term or buy things that are much lower quality. Those are two ways to boost up your yield. But both increase your risk.

Vigeland: So is that an argument for going with a larger mutual fund company?

Waggoner: It’s an argument for going with a larger mutual fund company and it’s also an argument to just be wary of funds that seem to have relatively high yields. If the average fund’s getting 0.17 percent, and you see someone who’s offering half a percent, you have to say, “Golly, how are they doing that anyway?”

Vigeland: At this point, aren’t you going to get a better return, even if you just go with a high-yield online savings account?

Waggoner: Absolutely. You’ll not only get a higher return, but you’ll get FDIC insurance for the full amount up to $250,000. So yeah, if you’re looking for just rock-solid safety, banks are the place to be.

Vigeland: And isn’t that what money market mutual funds used to be?

Waggoner: Oh once upon a time, yes they were.

Vigeland: Boy, once upon a time, that seems to sum up the entire financial crisis, doesn’t it?

Waggoner: Oh it sure does. And you never know what surprises still lay in store for us.

Vigeland: John Waggoner is the mutual fund columnist for USA Today. Thanks so much for your time.

Waggoner: Thank you.

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