Whereas money market accounts are a type of insured savings account offered by banks and credit unions, money market funds are mutual funds, which until last week were not insured against investment loss. Historically, money market funds have been widely viewed as extremely safe. However, within the mix of bad news last week came word that for only the second time in history a money market fund’s share price fell below one dollar. The Reserve Primary Fund got into trouble because of investments in Lehman Brothers securities. Then came news that Putnam Investments would be shutting down one of its institutional investor money market funds because of rapid withdrawals. At the end of the week the Treasury Department announced a program that will insure against investment losses the holdings of any money market fund that pays to participate in the program. The program has been established for one year.
Money market funds have been a popular place to keep emergency fund money or money for a near-term purchase. Such funds offer safety (well, historically that’s been true), ease of access, and usually better interest rates than bank savings accounts. However, even within such a conservative investment vehicle the interest rates offered by different funds vary, which has tempted some savers to choose funds based strictly on the rate offered. A Time magazine article noted that the Primary Fund was a high yielding money market fund because it held relatively riskier investments. A word to the wise: when choosing where to put your emergency fund or short-term-goal money, the risk of chasing an extra point of interest may outweigh the rewards.
Comments are closed.