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I have been reading that many large banks are quietly putting aside money to keep Money Market Mutual Funds solvent. The credit crunch is having an effect on Money Market Funds and they may not be able to maintain their constant dollar level. Considering over 7 Trillion dollars is in Money Market Funds currently paying about 5% interest, if people got nervous and started pulling out their money from these previously safe investments, financial chaos will result.
The Associated Press: Money Funds Set Aside Cash for Trouble (broken link)
Are you nervous about the funds you have in Money Market Funds?
Is this for real? I will admit I've shifted some monies to a money market fund from other riskier investments and you're telling me that money may be at risk? Please elaborate or point me to some additional relevant research on this.
Lastly, if not money market, then what other investment area should you put 401k monies you wish to be super conservative with?
Is this for real? I will admit I've shifted some monies to a money market fund from other riskier investments and you're telling me that money may be at risk? Please elaborate or point me to some additional relevant research on this.
Lastly, if not money market, then what other investment area should you put 401k monies you wish to be super conservative with?
I was surprised to find this out recently, too. Pulled out the money in my 401K from the market and left it to sit quietly and safely (?) in the money market fund. Once by accident, just talking with Schwab about something else, found out I was eligible for another money market fund of theirs offering higher interest rate. Looked at the prospectus and sure enough it said "the fund CAN lose money"... At first I thought this was the case because it was paying higher interest, but decided to take a look at the regular money market fund (never have before) and compare. Sure enough, same fine print was there as well. I thought they never lose, too.
Just about anything that is not fully insured could lose money.
Well, Schwab, for instance, does have an insurance equivalent to FDIC, but it's only relevant if the company goes bankrupt. Still, I never thought before that a money market fund can lose money. I knew the gain varies, of course, but losing principal was a foreign concept to me...
Money market funds that hold asset-backed commercial paper are at risk for having to write down those holdings. Treasury Funds that invest in short-term government debt are safe.
Yike! It looks like this problem is industrywide.
GE, Legg Mason, Wachovia, Bank of America, ...
So if I am in a money market that is fdic insured I can still lose money even if it is not the kind that is not fdic insured??/ Please let me know about this.. asap. thank you also............ are cd returns safe
Last edited by berries; 11-14-2007 at 07:00 PM..
Reason: additional question
So if I am in a money market that is fdic insured I can still lose money even if it is not the kind that is not fdic insured??/ Please let me know about this.. asap. thank you also............ are cd returns safe
I don't think any money market fund is FDIC insured. I might be wrong. What Schwab told me is that they have equivalent to FDIC insurance to be applied in case they go bankrupt (can't find the exact abbreviation right now). It has nothing to do with the possibility of the money market fund losing value. Apparently they are considered to be mutual funds after all...
That's what they advise for the money market funds:
Are money market funds insured?
An investment in a money market fund is neither insured nor guaranteed by the Federal Deposit Insurance Corporation (FDIC). Because the value of money market funds is intended to be stable, they invest in short-term securities, none of which can represent greater than 5% of the total value of the fund. Since money market funds are not insured, they usually pay slightly more than money market deposit accounts, accounts which banks offer that are FDIC-insured and offer next-day liquidity.
What are the risks of investing in a money market fund?
While money market funds are designed to have stable principal—in other words, a constant $1.00 price per share—they are subject to:
Income risk—This occurs when short-term interest rates decline. In comparison to rates locked in over a longer time horizon, money market funds will generate less income due to their shorter time horizon. Conversely, when interest rates rise, money market fund yields tend to rise faster than longer-term interest products.
Inflation risk—This occurs when inflation increases faster than short-term interest rates. Inflation risk is limited, because the average duration of money market funds is 90 days and short-term interest rates usually incorporate inflation.
Credit risk—This occurs when an underlying security defaults or its credit rating is downgraded. Because money market funds are mutual funds which invest in hundreds of securities, the effect of a single default or downgrade is minimal. Money market funds cannot invest more than 5% of their portfolio in any single issuer, and exposure to any one industry is similarly limited.
Further, money market funds must invest exclusively in higher-quality securities. They are required to invest in securities that are in the top two tiers of credit quality. Schwab money market funds typically invest only in securities in the topmost tier of credit quality.
What do money market funds invest in?
Money market funds are mutual funds that invest in high-quality, short-term debt instruments like commercial paper, CDs, bank notes and U.S. government obligations that have maturities of 13 months (397 days) or less. Money market funds, by definition, must maintain a dollar-weighted average portfolio maturity of 90 days or less. In a rising interest-rate environment, this means a money market fund portfolio has the flexibility to constantly update its holdings to include higher-yielding securities.
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