Is Your Money Market Fund Safe?

News of value losses in money market funds sent shivers down the spines of investors from Maine to California. Learn what the federal government is doing to help you keep the faith.

Funny man Douglas Adams once said, "Ah, this is obviously some strange usage of the word 'safe' that I wasn't previously aware of." His words, spoken long before the current economic crisis, articulate exactly what's happened with money market funds: fund managers and investors lost track of what 'safe' really means.

Same-as-cash, not exactly

Money market funds have long been considered the safe haven of investing-so much so, that deposits are priced as cash, at $1 per share. The funds have enjoyed such a reliable reputation for so long, because their portfolios are heavily regulated and rarely experience value losses. Prior to this year, only one money market fund has ever dropped below $1 per share-Community Bankers US Government Fund in 1994.

Note that money market funds are not the same thing as money market deposit accounts. The latter are FDIC-insured bank accounts, while money market funds are specialty mutual funds that invest in short-term corporate and government debt.

In September, three money market funds managed by The Reserve slid below a dollar per share. Investors everywhere were shocked. They began pulling their cash out of money funds, for fear that they would experience losses, too. The rapid outflow of investor cash threatened to seize up U.S. money funds and stifle the short-term debt market. In response, the federal government stepped in with a guarantee program to comfort nervous investors.

The federal money market promise

The federal guarantee program is not intended to make money market funds as safe as cash. It's intended to restore investor confidence and preserve the interaction between money markets and short-term corporate debt.

Fund companies that wish to receive the government coverage will have to opt-in to the program and pay the associated fees. If the fund signs up, all investors in that fund are automatically covered.

Keep in mind that your money fund investments are only protected up to the number of shares in your account as of September 19, 2008. Any shares purchased after that date won't be covered. If your share count goes up and down, your guaranteed share count will be the lesser of (1) the number of shares you owned on September 19, and (2) the number of shares you own the day a guarantee payment is made.  

Finally, this program is temporary; the coverage is set to expire after 12 months.  

Several fund companies have already announced their decision to participate in the program. Check your particular fund company's website and then make a quick phone call to see if your money fund investment is covered.

The economic news of the last several weeks has redefined "safe"-and not in a good way. Times like these will usually tell you what your real risk tolerance is-so listen to that inner voice and structure your assets accordingly.