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Personal Finance 101
How Safe is Your Money Market Fund?By Catherine
BillSavings.com Brief:
The money market fund industry is in rough shape along with the financial industry as a whole, at this writing. In order to reassure yourself that all is well, you should stay on top of your rankings and do what you can to invest wisely. Only then can you get through this challenge with more instead of less than you started out with.
It's no secret that the money market fund industry is shaken up. The ground underneath it quakes when a fund's net asset value (NAV) drops below $1 per share. For only the second time since the Community Bankers U.S. Government Money Market Fund liquidated in 1994, this has happened. Reserve Primary Fund cut its NAV to $0.97 in mid-September after taking a hit on its Lehman Brothers holdings. Lehman Brothers, just one victim in an ongoing financial crisis, filed for bankruptcy recently. According to Money Fund Intelligence, the Reserve Primary Fund had approximately $62 billion in assets until investors freaked out and withdrew more than $27 billion in two days this past week. The fund's Lehman Brothers holdings added up to around $785 million. When Lehman Brothers commercial paper goes from the highest short-term rating to no rating at all, the Reserve should take aggressive steps to comfort investors. When they don't reassure and instead allow the crisis to continue, the results are unfortunate for everyone. The good news? There are some retail investors in Reserve Primary Fund, but mostly its institutional money. However, other funds that have dealings with Lehman Brothers commercial paper or medium-term notes are disclosing that they have taken steps to protect the fund. Most have simply bought it out. These include the Russell Money Market Fund, Columbia Cash Reserves, Evergreen Money Market Fund, Evergreen Institutional Money Market Fund, Evergreen Prime Cash Management Fund and Ameriprise RiverSource. Columbia Management is division of Bank of America in the primary investment department and Evergreen Investments is a part of Wachovia as their asset management division. Some companies believe in full disclosure. For example, Fidelity has disclosed on their websites how much Lehman Brothers and AIG commercial paper they have in their money market funds. If you're concerned about a money market fund that you invested in through your bank or brokerage, call your personal banker and ask plenty of questions. Demand answers so you know where you stand. An industry exception Hopefully, the Reserve Primary Fund's failure to keep its $1 NAV will be an anomaly. None of the big retail funds have had any events that signal a bailout. This is because the ones with big backing from financial parent companies have the funds to fill any tiny crevices before they become huge craters. Twenty such instances have occurred so far where financial advisers have protected a troubled security. This protection eases the fears of investors. They know that at least another bank or financial institution is protecting the holding. The Reserve Primary Fund's NAV might go lower due to the trend toward liquidations by skittish investors. However, the NAV may hike higher in the upcoming days due to the fact that Lehman commercial paper was valued at zero. It's almost definitely worth more than zero because of the Barclays purchase. The Reserve Primary Fund has put forth redemptions restrictions. If you are an investor looking to cash out, you should find that you'll have to wait seven days to receive your funds. This delay does not apply to everything and excludes debit card transactions, ACH (Automated Clearing House) transactions or checks, but those dealings will be limited to $10,000. Consumers shouldn't ignore the fact that investing in a money market fund involves potential risk. This is something too expensive to ignore. For too long, people have chosen a money market fund based on nonsense. You shouldn't value convenience or yield over the underlying investments and sound financial reasoning. Especially in the last few years, many money market funds sought higher-yielding investments like subprime mortgage-backed securities. They then got in trouble when those securities defaulted. High-yield funds don't get those yields by investing in government securities. According to Standard & Poor's, there are approximately 2,000 money market mutual funds out there, 1,200 of which are taxable. Within the taxable universe there are about 700 that can invest in commercial paper; the 500 left over would invest in government securities. Know your funds You should always understand and know your investment portfolio. If you're invested in a Treasury or government agency then, obviously, you don't have to worry about commercial paper. But if your fund is a prime or a general purpose type fund, it could have commercial paper. Even if it doesn't, make sure. Typically most of the 200 funds out there can purchase commercial paper with the rest in repurchase agreements, Treasury, agencies, bank paper and a variety of other money market investments. Don't forget that money market funds are not the same as money market accounts. They are not insured by FDIC or the Securities Investor Protection Corp (SIPC). Public perception and confidence are a huge part of any financial issue. If you invest in everything that's out there, including places where the funds are not FDIC-insured, you might be under the mistaken impression that places like Bank of America are completely safe or that a money market fund is risk-free. That's a costly error. Consider a plan to stick with funds backed by the larger companies. Also, check the yield at least once a week during times like this where the economy is in trouble. Keep on top of things. Huge drops could be an indication that the fund is decreasing yield to make up the difference when taking a hit. Stay informed and educated when it comes to mutual funds and anywhere else you keep your money.
10/8/2008
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