About retail money funds
April 01, 2011
Money market funds, also called money funds, are liquid funds that invest in short-term debt securities. Money funds can be purchased by individuals from mutual fund companies or brokerage firms. Money funds are required by the SEC to keep the average maturity of their holdings below 60 days.
The difference from deposits
Although money funds have a long history of safety, they differ from the savings accounts, checking accounts, CDs and money market accounts offered by FDIC-insured banks. Technically, money funds are classified as a type of mutual fund with a price that, in theory, can fluctuate. With a few exceptions, money funds have been able to maintain their stable $1 net asset value.
Money funds have achieved price stability by holding liquid short-term investments such as high-rated commercial paper, government-backed financial instruments and U.S. Treasury securities. SEC regulations now require that money fund managers hold in their portfolio short-term debt obligations and cash instruments with a weighted average maturity of 90 days or less.
In addition, the SEC requires money funds to hold at a minimum 10 percent of their assets in securities that can be sold for cash within a day and at least 30 percent of their assets must be able to be converted into cash within a week.
SEC rules also require public disclosure of money fund portfolio holdings. These rules helped alleviate some of the concerns over the safety of money funds that cropped up in 2008 after well-publicized problems with a few funds that were hit with the losses associated with the bankruptcy of Lehman Brothers. On the downside for investors, the rules have made it harder for portfolio managers to find ways to boost money fund yields.
Money funds have a long history of maintaining their $1 share price. This stability was last threatened in 2008 when the commercial paper issued from a bankrupt Lehman Brothers suddenly became worthless. A few funds had to break the magical $1 share value to compensate for their investment loss.
About money funds
Money fund assets typically increase when political tension crops up around the world as investors look for safe havens for their cash. After a surge in money fund assets, following tension in the Middle East and the March earthquake in Japan, global investors have now returned assets back into the stock market.
Money funds can have important cash-management features even though yields are extremely low. Many companies use money funds to help manage their operating and cash accounts. Individual investors can use money funds as a place to park cash in their brokerage accounts as they wait for investing opportunities.
Money funds do not serve as a good replacement for a checking account at a bank. Withdrawals are limited by regulation and the yields on money funds do not match the best rates on checking accounts offered by FDIC-insured banks.
Rules from the Securities and Exchange Commission regulate how mutual fund companies can invest money for their money market funds. Another regulation requires funds to disclose their holdings every month on their website. This disclosure rule should make it easier for analysts to identify potential risk in funds, with the goal of preventing exposure to low-rated commercial paper.
Money fund insurance
The Treasury Department's Temporary Guarantee Program for money market funds ran from September 2008 to September 2009 to help maintain confidence in the safety of money funds. Mutual fund giants, Fidelity Investments and Vanguard Group, were just two of the major companies participating in the U.S. Treasury's emergency insurance program for money-market mutual funds.
The opt-in program, which protected investors from losses on money deposited into money funds before September 19, 2008, was guaranteed by the Treasury Department's Exchange Stabilization Fund up to $50 billion. The government program, now expired, had a more than 97 percent participation rate in the industry and is considered a success by industry professionals.
