INSIGHTS & IDEAS

How safe is your money market fund?

 

With the recent turmoil in the stock market, many people are playing it safe by cashing out of equities and sitting on large money market funds waiting for better times.   But, how safe is your money market fund?

 

Have you ever wondered why money market funds in brokerage accounts pay 1 to 2% higher than CD’s at your local bank?  One big reason is that they are not FDIC insured.  Another reason is how they invest their money.  Even those money market funds that only invest in AAA securities are subject to more risk than we may be aware of.  To get around the rules and regulations many of these funds invest with subsidiaries that in turn use these funds to invest in more risky investments.  Some are called structured investment vehicles (SIV’s) which in turn are backed by collateralized debt obligations (CDO’s).  It’s beginning to sound like a collateralized mortgage security! 

 

The actual workings of these money market funds is way beyond the scope of this article and my knowledge of financial securities.  Suffice to say that unless your cash is invested in U.S. Treasury obligations or FDIC insured bank CD’s you may be investing in more risky securities than the ones you just sold.    



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