Money Funds: Are They Safe? Ask Liz Weston - AARP The Magazine

Is Your Money Fund Safe

In healthier economic times money funds were seen as a sure thing But times are changing

Dear Liz: We have a lot of cash sitting in a money market fund, which I always thought was safe. Lately, though, I've been hearing that debt problems around the world could jeopardize money funds. Are the funds safe or not? Photo by Adam Voorhes The shifting winds of the markets have affected money funds. They're pretty safe, just not perfectly safe. Unlike bank accounts, aren't insured by the federal government. funds almost always are priced at $1 a share, but during the 2008 financial crisis a fund known as the Reserve Primary Fund dropped to 97 cents a share. (It had lost money on securities in the failed Lehman Brothers investment bank.) A handful of other funds would also have dropped a few pennies per share, but the fund companies voluntarily made up the losses, and Uncle Sam stepped in with a temporary guarantee to keep panicky investors from pulling out. See also:

Get Higher Yields

Beat stingy money-fund rates by finding bank CDs or savings accounts on Bankrate.com or MoneyRates.com. Money funds are mutual funds. Money market accounts come from banks. Key: Banks have FDIC insurance. Today, if a fund yields much more than 0.2 percent, it isn't a true money fund. It's taking risks the manager isn't telling you about. Since then, the Securities and Exchange Commission has further limited the risks money funds can take, requiring them, among other things, to put a greater share of their portfolios in securities that can be quickly converted to cash. Fund managers say their exposure to wobbly foreign debt is minimal, and besides, Uncle Sam would step in again if things got too bad. Probably.

Next: Still, you don't want to invest expecting to be bailed out. And you're certainly not being compensated for the risk: Money funds are paying as little as 0.01 percent. (Not a misprint.) Many banks offer more, along with a federal guarantee. And that is perfectly safe.

Risk No Reward br

Used to be that money market funds offered higher yields than . That was your reward for taking a little extra risk and forgoing the bank's federal insurance. These days, though, there's no reward for the risk. The assets money funds hold, such as Treasury bills, yield close to zero. Lots of banks beat that. With a little online digging, you can squeeze out half a percent or so in a CD or savings account insured by the FDIC (banks) or the CUNA ().
Liz Weston, author of The 10 Commandments of Money, blogs at Cancel You are leaving AARP.org and going to the website of our trusted provider. The provider’s terms, conditions and policies apply. Please return to AARP.org to learn more about other benefits. Your email address is now confirmed. You'll start receiving the latest news, benefits, events, and programs related to AARP's mission to empower people to choose how they live as they age. You can also by updating your account at anytime. You will be asked to register or log in. Cancel Offer Details Disclosures

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