Are money funds safe now?New federal insurance puts a partial safety net under money funds. Here's how to cut your risk even more.By Carolyn Bigda writer-reporter, Money Magazine
October 15, 2008: 5:14 AM ET
(Money Magazine) -- You normally wouldn't think twice about putting
cash in a money-market fund. But when America's original money fund
company, The Reserve, announced in mid-September that investors in its
Primary Fund would lose money, the news sent a chilling reminder to
savers - who keep $3.4 trillion in such funds - that no money fund is
completely safe.Money funds normally stay at $1 a share. But the
Primary Fund's share value "broke the buck," falling to 97¢ because the
fund had invested in commercial paper issued by failed investment bank
Lehman Brothers. Scary headlines that followed triggered frantic
withdrawals from other money funds.Enter the U.S. Treasury. On
Sept. 19, it put in place a new guarantee for money funds - essentially
a type of FDIC insurance - promising that investors will get $1 back
for every $1 invested, with no dollar limit. Whew!The so-called
Temporary Guarantee Program will last only three months but can be
extended into 2009 if needed. However, it applies only to cash that was
in money funds as of Sept. 19, and not all money funds may choose to
sign up. That means you still have some work to do to stay safe.What to do now
Call your money fund.Though funds aren't required to disclose participation, most will do
so. Schwab and BlackRock, for example, have said they intend to buy the
insurance.
Go for big financial firms. Even if your fund
participates, new money will not be insured. To be safe, stick to
financial firms such as Vanguard, Fidelity and American Funds that have
the financial resources to preserve the $1 share value in their funds.
Look for low fees.The average expense ratio for money funds is 0.6%. Look for a fund
whose fees are lower: It won't have to make up for costs with
high-yielding, risky investments.
Don't chase yield. The
average yield for taxable money funds is 1.9%. If you see one whose
yield is much higher, that could be a sign that it's taking too many
risks.
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