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 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.

Money markets, whether funds or accounts, are about safety and liquidity.

So, if chasing after slightly higher yields doesn’t make sense, how do you choose one money market over another?

Base the choice on convenience. A key factor is your ability to move money back and forth between a money market and other investments. If you have a lot of investments with a mutual fund company, use one of its money market funds. That way, proceeds from any investment sales can immediately move into the money market fund to start earning interest.

You can use checks issued by the money market fund to get at the money immediately. And if you find a new investment with the same fund company, you can use a phone call or click of a mouse to pay for it out of the money market fund. Also, interest and dividends from various investments can be automatically “swept” into the money market fund.

For a money market account, your best choice is probably the one offered by the bank you use for checking, savings, CDs and perhaps your mortgage. With electronic banking, you can easily move money from place to place.

The money market account is perfect for a rainy-day fund. It’s readily accessible, even if you are limited to just a few transactions a month, and it will pay a bit more than you’d earn in a savings account or interest-bearing checking account.

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