Wednesday, February 20, 2008

Do I need to worry about my money market funds?

In short, no, you do not need to worry about your retail money market funds.

Some commentaters are suggesting that difficulties with auction rate securities (ARS) or floaters is somehow evidence that even retail money market funds are now at great risk. That simply is not true. Although the risk with retail money market funds is not absolutely zero (as a very quick glance at the fine print clearly tells you), the risk is very low compared to ARS and some of these other "cash management vehicles" that supposedly "qualified" and "high net worth" investors have been using to try to buy themselves a free lunch. Put simply, you absolutely do not need to lose any sleep over "cash" that you have in well-known retail money market funds.

ARS are extremely complex products and are at their core bond funds and not even short-term bond funds at that. Retail money market funds are by definition and by regulation based on short-term debt securites, with a maximum maturing of 397 days and an average maturity of no more than 90 days.

If you are still anxious about your money market funds, simply shift your money into the larger funds such as Fidelity and Vanguard. Or in some cases there are still bank deposit CDs or money market accounts that offer competitive yields.

One word of caution... although banks do offer FDIC protection, it is only up to a limit of $100,000 (or $200,000 for joint accounts and $250,000 for IRAs), so if you were to shift more than that limit from a money market fund to a bank deposit account, and the bank were to fail, you could actually lose more money (the amount above the limit) than if your money market fund had had a modest loss.

Institutional money market funds and "enhanced cash" products may have added risks, but that is outside of my financial "league."

It is doubly ironic that people who entrusted their "cash" to investments in ARS put their money at greater risk than if they had invested that money in "troubled" Countrywide Bank. Right now, Countrywide is offering a yield (APY) of 4.50% for their FDIC-protected (up to the usual limits) "savingslink" money market deposit account. That rate is not guaranteed to last if the Fed keeps lowering rates, but you can get a 6-month CD from Countrywide with a yield of 4.45% APY.

-- Jack Krupansky

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