Are Money Market Funds Safe?

If you’re an investor with some cash to invest, you’re probably asking, “Are money market funds safe?” The decision to save more money is almost never easy, but deciding to save money and maintain liquidity can be a challenge.

Money market investments can help you earn a higher interest rate on your money without the requirement of tying up funds for a long time period. Before you decide to invest in the money markets, it’s important to distinguish between money market funds and bank money market accounts. Money market funds and money market accounts aren’t identical:

  • Money market accounts are a kind of savings account offered by your bank or credit union.
  • In comparison, money market funds are frequently offered as part of a retirement plan mutual fund family. These mutual funds contain the debt securities of corporations, governments, and agencies.

If you’re interested in putting retirement money into a money market mutual fund, read the fine print first.

Are Money Market Funds Safe? Debt Credit Ratings

For decades, money market mutual funds were sold to investors as no-risk investments. Unfortunately, money market funds are a type of mutual fund, and investing in a mutual fund is never risk-free.

Although default in the money markets is rare, the Great Recession that began in 2008 demonstrated how quickly the nation’s largest banks and corporations could suffer from a credit crunch.

Money market funds are typically perceived as riskless investments because portfolio fund managers are often conservative about the kinds of debt issues they purchase. If the mutual fund you’re interested in contains mostly federal government and agency short-term debt obligations, your capital is safe.

However, if the portfolio manager buys riskier debt to boost the portfolio’s return, your money’s safety depends on the borrower’s ability to repay the bond loan. If you’re evaluating money market funds to keep money liquid and completely safe, opening a bank money market account is best.

Are Money Market Funds Safe? Money Market Accounts

Money market accounts are frequently confused with money market funds. Both investments tend to focus on short-term debt obligations like Treasury bills. Both investments are similar because they provide relative flexibility and liquidity according to standard federal government transaction limits.

In other words, money market accounts and money market funds frequently offer you the option to write a check or make a withdrawal as needed. The major difference between the two investment types is that money market accounts are insured by the Federal Deposit Insurance Corporation (FDIC). Each depositor is insured against loss of up to USD 250,000.

Money market funds aren’t insured by the FDIC. In the event of a credit crunch or financial system calamity, money in these funds isn’t insured. In that case, it’s possible to lose some or all of your money in the investment. To that end, it’s also a good idea to read the prospectus to review asset quality along with fees and costs associated with owning money market investments.

Are Money Market Funds Safe? Money Market Investing

The money market isn’t a physical exchange. It’s actually a financial market segment consisting of highly liquid, short-maturity debt. The money market offers a conduit for borrowers and lenders to exchange money market securities, such as repurchase agreements (repos), negotiable certificates of deposit (NCDs), short-term investment pools (STIPs), federal funds, bankers’ acceptances, futures contracts, swaps, commercial paper, Treasury bills (T-bills), government-sponsored enterprise securities, Eurodollar time deposits, money market mutual funds, municipal notes and others.

Participants of the money market include companies hoping to raise money by selling short-term commercial paper, banks in search of overnight financing, and investors in search of short-term tax-free paper.

The money market differs from the capital markets. The capital markets offer businesses with the opportunity to sell equity to investors. Purchasers in the money market are actually lenders to the borrower governments or businesses in search of money. Sellers in the money market offer investors a short-term return on funds. If you invest in the money market, it’s possible to quickly secure the paid interest as long as the borrower has the ability to repay principal and interest.

Are Money Market Funds Safe? Broad Diversification

When you build a securities portfolio, a portion of your allocation may be invested in safe and liquid funds, frequently referred to as cash. The cash portfolio component may be represented by liquid funds, as if you deposited cash into a savings account.

Since investors can earn more money on portfolio cash in the money market, it’s important to invest according to your financial objectives:

  • If you’re risk averse, about to retire, or already in retirement, an FDIC-insured money market account can help you retain safety and liquidity as well as a slightly higher return on your money.
  • If you’re an investor with greater risk tolerance, money market funds that offer higher rates are an option.

The ultimate to answer to “Are money market funds safe?” depends on asset quality and your financial goals and objectives. If you’re in doubt about credit or asset quality of the money market, ask your bank or credit union about FDIC-insured money market accounts.