A year ago, savers were shocked by the news that a major money market fund had “broken the buck,” triggering worries about whether cash holdings were safe.
Turns out they were. And they still are.
The drama centered on the Reserve Primary Fund, which had about $62.6 billion in assets until $40 billion was suddenly withdrawn when investors realized the fund was packed with debt securities from Lehman Brothers (Stock Quote: LEHMQ), the collapsing investment bank.
Because of the withdrawals, the fund’s net asset value, or share price, fell to 97 cents. Money market funds do all they can to keep the share price at $1, and have historically been very successful at it.
Despite investors’ troubles with that fund, other money market funds have held up just fine. The government stepped in with guarantees to prop them up, and has been so successful the program is now slated to wind down.
But that doesn’t mean all is perfect from investors’ perspective. Money market funds and money market accounts are terribly stingy. The accounts, offered by banks, yield a meager 0.433%, on average.Most funds, from mutual fund companies, don’t even do that well. The Vanguard Group mutual fund company, for example, offers nine money market funds, and only one beats the money market account average. That one, Vanguard’s Prime Money Market Fund (Stock Quote: VMMXX) pays 0.49%.
Of the two types of money markets, those at banks are theoretically more safe because they are insured by the Federal Deposit Insurance Corp. But since money market funds have weathered the financial crisis, safety is not much of a factor in choosing a fund over an account, or vice versa.