Is Your Money Market Fund Safe? -- Sushi Money

Aug 28 2007

Is Your Money Market Fund Safe?

In recent years, consumers are using money market funds in much the same way as a bank savings account. Many money market funds even allow you to write a limited number of checks. Yet the phrase “money market fund” is very broad. Most banking institutions have what are called money market deposit accounts. These are different from money market mutual funds, typically offered by financial institutions like brokerage or mutual fund companies.

What is the key difference? In most cases, money market deposit accounts at banking institutions are fully insured with the FDIC (Federal Deposit Insurance Corporation) for up to $100,000 protection for losses, just like a checking or savings account. Check the FDIC link to review what is, or is not insured at your bank or financial institution. But money market mutual funds are different animals, and may be invested in different products to achieve a higher rate of return for consumers. And they are generally not FDIC insured.

*** Update: 2008 *** Due to the financial crisis in September/October 2008, the U.S. government has agreed to provide temporary FDIC insurance coverage for money market mutual funds of participating financial institutions. Additionally, FDIC insurance has now been increased temporarily from basic amounts of $100,000 per customer deposit account to $250,000. For more information, see the FDIC website.

Rumors and concern by consumers for money market accounts have been flying around the internet in the past few months, with many people wondering how “safe” their money is with various banks and mutual fund accounts. I know I was curious as well… are you? Many of these fears may be unfounded, but there’s nothing wrong with making sure you are comfortable where you are putting your money. So if you’re invested in a high-yield money market mutual fund, and don’t have FDIC insurance coverage, does this mean your money is at greater risk of loss? Perhaps… remotely. If my financial institution was investing in high-yield commercial paper, with mortgage bonds or subprime CDO’s as the majority of assets… I would probably not feel comfortable, and would move my money elsewhere.

But CNN/Money has written an excellent article today titled Debunking Money Market Fears while discussing how there has only been one money market fund that “lost” money for consumers over the past twenty years, paying .94 cents on the dollar after shutting down. More typically, a financial insitution will make sure they “back up” their money market mutual funds to ensure their reputation and client confidence is maintained.

One of the best dicussions of the topic was addressed recently at Vanguard. The Vanguard Prime Money Market fund is a low cost, high yield money market fund. Is this fund insured by the FDIC? No. But is it a safe money market fund? In my opinion, very safe. Responding to concern by clients and investors, the company addressed the issue recently in the article, Vanguard money markets well-positioned for market volatility. To quote how Vanguard invests with the Prime money market fund:

“What are the largest holdings of Vanguard Prime Money Market?”

“The largest category is bank certificates of deposit, slightly over half of the fund’s assets. U.S. government agency bonds and commercial paper are each about one-fifth of the portfolio. The commercial paper is short-term debt issued by blue-chip companies such as General Electric and Wal-Mart.”

Looks like a very sound portfolio to me, and it was good information to know. What about your money market mutual fund? Do you know what they are investing in? I also appreciate companies who provide full disclosure to investors. Those who have been the most concerned about risk have moved a great deal of money into U.S. government treasury bonds, and funds that invest in treasuries, seeing that as the safest place. After all, if the government’s treasury bonds are ever at risk, then we’re all in trouble! Nothing wrong with that at all.

We need to make decisions about what we believe is best… putting our money where we feel the most comfortable. If that’s a bank savings account or CD, then that’s the place to go. There are many excellent choices, and good, solid money market funds. For a real bank savings account, there are terrific options like ING Direct, currently offering a 4.5% savings rate. You can open a savings account in under five minutes with no fees, no minimums and FDIC insurance. ING Direct offers simple online transfers to and from any checking account you prefer.

I personally believe our money is safe with most money market funds in the financial services industry whether FDIC insured or not, and will continue using Vanguard Prime as my money market fund of choice. How about you? Have you moved money around recently, or are you concerned about your own money market funds? I would love to hear your feedback!

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