NEW YORK (MainStreet) — Is your money market mutual fund safe?
Historically these “cash” funds have done fine even in turbulent markets, but some experts now worry that investors could suffer losses due to the European debt crisis. If you’re concerned, it might be a good time to consider a switch, perhaps to a money market account at your bank or credit union.
Throughout the years, money market funds have produced a good record of maintaining the $1-per-share value promised to investors. The sole exception in recent years was when the Reserve Primary Fund “broke the buck” in the heat of the financial crisis in 2008. After that the Securities and Exchange Commission took steps to reduce risk in money funds’ holdings, such as commercial paper issued by big corporations. However, those moves may not be enough if troubles in Europe continue to deepen.
The good news is that money fund yields are so low (averaging around 0.05% according to Crane Data) that inconvenience rather than lost earnings is the main issue when considering a switch out of one of these funds, which are provided by a brokerage or mutual fund company. In fact, the average money market account held at a bank yields more, about 0.175%, according to the BankingMyWay.com survey.
Money market accounts, like certificates of deposit and savings accounts, have federal FDIC insurance, making them as safe as can be. Money market funds do not.
Despite the funds’ slightly higher risks, many small investors use them as a convenient way to hold cash reserves or money that will later flow into other investments. If your money market and other investments are managed by the same institution, cash can be moved in and out of the money fund with a few clicks of a mouse or a phone call.
If the news out of Europe makes you nervous, the first step is to ask your broker or fund company what the money fund’s managers are doing to minimize their exposure to European securities. It may be that you have nothing to worry about.
If you still want to play it safe, though, move some or all of your cash to an FDIC-insured money market account, a CD, a savings account or a checking account, all available at any bank. These days most brokerages, fund companies and banks allow customers to set up electronic links to accounts at other firms to make it easy to transfer cash from one institution to another.
Keep in mind, though, that it can take several days for a transfer between institutions to be complete, probably longer than it takes for money to move between accounts within a single institution. If you need to have cash available for investing on short notice, you can keep the bare minimum in the money fund at the brokerage or fund company.
Generally, savers and investors are told to shop around for the best yields. While that’s sound advice, yields are currently so low it’s probably not worth opening an account at an unfamiliar institution just to earn a few more basis points. In fact, if you move thousands of dollars to your bank from your brokerage or fund company, you may get a better deal on your banking services, so be sure to ask.
Finally, study your bank’s terms. To get the highest yield in a money market account, for example, you’ll probably need a minimum deposit of $10,000 or more, and there might be restrictions on the number of withdrawals you can make over a given period.
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