Say it with me: Money market mutual funds are not insured
— -- Q: I thought money market funds were safe. So, why am I losing 3% of my money on The Reserve Primary Fund?
A: You thought money market funds were safe? Join the club.
While money market funds don't have insurance from the Federal Deposit Insurance Corporation, they've long been considered safe. The rules money market funds must follow are strict and require the funds to invest in short-term securites issued by the most solid government entities and companies. And that's a big reason money funds are often seen as a place to get a better interest rate than what's offered in a bank, with only a slight increase in risk.
And the facts show how safe money funds have been over the years. Until the financial crisis of 2008, just one money market fund allowed its value to fall below $1 a share, called "breaking the buck." And that was the relatively small Community Bankers US Government Fund in 1994. Investors ultimately got back 96 cents on the dollar.
There have been times of stress for money markets before, but nearly all the time, fund families have made up losses in money funds from other sources. Having a fund break the buck is viewed as game over for most fund companies, so institutions will go to great lengths to keep that from happening.
But apparently, The Reserve didn't have the ability to shore up its ailing Primary fund. The fund took positions in Lehman Bros. debt, which it wrote down to nothing after the brokerage firm entered Chapter 11 bankruptcy protection. It told investors they could expect to get 97 cents on the dollar.
It's always terrible to see investors lose money, especially on investments that are supposed to be safe. And if an investor put a large sum into the money market, a 3% loss would be sizeable. For instance, had someone put $1 million into the fund they'd be looking at a $30,000 loss.
What's even more frustrating for investors is that The Reserve, despite being one of the oldest money funds, was the one to break the buck. There haven't been similar problems at major money market providers such as Vanguard, Fidelity and Federated.
Popular Reads
ABC News Live