How Safe Is Your Money Fund?

“A danger foreseen is half avoided.”—Thomas Fuller

Investors with a low tolerance for volatility and risk have been pouring money into safer havens, mostly money market funds. Assets held by money funds have rocketed into the stratosphere to $3.5 trillion, a 45% jump in just the past year. Financial experts maintain that those funds are as safe as any investment that isn’t insured by the federal government can be, but there are some clouds on the distant horizon.

According to a recent Fortune magazine report, behind the reputation for safety that money funds enjoy is the perception that the money they manage is invested in high-quality debt like US Treasury securities and short-term corporate bonds. But some money fund managers, in an effort to boost yields, have put some cash into more esoteric investments, like structured investment vehicles, or SIVs, the kind of mortgage-backed security that has caused huge writedowns at major banks, brokerages, and other financial houses.

One way to make sure your money fund assets are in safe hands is to ask. Find out if the fund complies with SEC regulations that require it to invest in only high-quality debt and to confirm that quality through its own due diligence, rather than relying on a third-party credit rating. For even more protection, seek out money funds managed by large and reputable fund firms like Vanguard, T. Rowe Price, or TIAA-CREF.

Fore more information visit iMoneyNet, the leading provider of money-market information and analysis.

1.03%—National average yield for $10,000 minimum deposit money market fund.(iMoneyNet, 2008)