Tough Times for Money Market Funds
Money market funds have historically been known to be safe and high return investment options in an otherwise unpredictable financial environment. But with changing times, the global economic market has taken a serious beating and even money market funds have become unpredictable.
Recently the reserve market fund which is a huge and widely respected fund announced that its customers would actually lose money. The investors had put in a dollar for each share and now the fund managers are saying that they are going to get only 97 cents to a buck! This is one of the first instances where a major fund has actually depreciated in value. And this is just an indicator of changing times to come. So for no other fund has fallen this bad, but one cannot really say when it may reoccur. But now even though other funds have hastened to say that nothing dire is going to happen with their money, one cannot be sure that it will not happen again. The question is that whether your money is really safe in a money market fund in this current economic scenario.
The primary fund’s fall was not an isolate incident. This happened exactly after Meryl lynch and Lehmann brothers announced bankruptcy. And the government had to bailout the mortgage giants Freddie Mac and Fannie Mae. These were the incidents which kicked off the global economic meltdown. This was followed by the fall of one of the greatest giants that the automotive industry has ever seen, general motors corporation. With so many biggies falling like a pack of cards, one cannot really be sure that a money market fund that is managed by some underpaid and overworked fund manager is really going to outperform the market.
There was a time when a person could invest money in a certificate of deposit and sleep well at night knowing that he or she is going to reap the benefits on maturity. But now the question is whether a bank which does not have money to run its operations will be able to pay out cash to its investors?
Money market funds are basically mutual funds which invest in securities in diverse areas of the market. It can include government securities, asset backed commercial papers, certificate of deposits and also other highly liquid securities around the market. The reason that the primary fund got into trouble was because a portion of its investments were in Lehmann brothers. After the fall, the fund had to block all redemptions for a period of one week to ensure that there was not a wide spread knee jerk reaction to the incident.
But a money market deposit account is different. It is insured up to an amount of $250000 by the federal deposit insurance corporation (FDIC). This is a good option because it is insured by an entity that cannot fall under the stress of the economic meltdown. The government directly backs all insurance initiatives and in any adverse scenario you can be rest assured that you will at the least get your principle amount back from the company.
