Money Markets Just Got Safer

The Securities and Exchange Commission has adopted new rules to make money market mutual funds safer, responding to a “breaking-the-buck” incident that roiled markets in September 2008, leaving many investors worrying about whether their money was safe.

The new rules were adopted Jan. 27 and bar funds from investing in illiquid, risky assets, better insuring that money market funds will hold steady at $1 a share and be able to meet shareholder redemptions.

So, how risky are money markets? The short answer: not very. Their track record is excellent. For a longer answer, it’s important to remember that there are two types of money markets.

The SEC action involves money market mutual funds operated by fund companies and brokerages. They invest in short-term securities and pose a theoretical risk of loss. The Reserve Primary Fund lost money in 2008 because of investments in securities issued by Lehman Brothers, the failed investment bank. Risky holdings like that are now banned, but the government does not guarantee you’ll get back every dollar you put in.

The second form is the money market account held at a bank. These are insured against loss by the Federal Deposit Insurance Corp., a federal agency. Your money is just as safe as it would be in an insured savings account or certificate of deposit.

Because money market funds have such a good track record, the distinction between the two types makes little practical difference since neither pays much interest these days. The BankingMyWay.com Survey finds the typical money market account yielding 0.358%. You can do a bit better looking around with the shopping tool, but you’re not going to get rich.

Money market funds usually pay about the same, though many are even stingier than money market accounts right now. Yields vary a bit more depending on the kind of securities a fund owns. Some specialize in U.S. government securities, others in municipal bonds or bank CDs, for instance. But the general rule applies: you won’t get rich.