Has anyone lost money in a money market fund?
If the interest earned is low enough and the fees for the account are high enough, you may lose money. Although money market accounts aren't subject to the ups and downs of the stock market, they may come with higher fees than other savings products.
Smith: Since their introduction in 1971, money market funds have broken the buck just two times. The first was in 1994, when a fund was liquidated at 96 cents per share because of large losses in derivatives.
The Bottom Line. Both money market accounts and money market funds are relatively safe, low-risk investments, but MMAs are insured up to $250,000 per depositor by the FDIC and money market funds aren't. Banks use money from MMAs to invest in stable, short-term securities with minimal risk that are liquid.
Low Risk and Short Duration
As stated above, money market funds are often considered less risky than their stock and bond counterparts. That's because these types of funds typically invest in low-risk vehicles such as certificates of deposit (CDs), Treasury bills (T-Bills), and short-term commercial paper.
Money market accounts tend to pay you higher interest rates than other types of savings accounts. On the other hand, money market accounts usually limit the number of transactions you can make by check, debit card, or electronic transfer.
However, money market funds are not suitable for long term investment goals, like retirement planning. This is because they don't offer much capital appreciation.
On Sept. 16, 2008, the Reserve Primary Fund broke the buck when its net asset value (NAV) fell to $0.97 cents per share. It was one of the first times in the history of investing that a retail money market fund had failed to maintain a $1 per share NAV. The implications sent shockwaves through the industry.
If the security accounts for 0.5 percent or more of the fund's portfolio, the fund also must report the default to the SEC. In addition, the US government's failure to pay its obligations could trigger a severe downgrade of its short-term credit rating by NRSROs.
If the variance does exceed $0.005 per share, the fund could be considered to have broken the buck, and regulators may force it into liquidation. Buck breaking has rarely happened. Up to the 2008 financial crisis, only three money funds had broken the buck in the 37-year history of money funds.
- Limited transactions. Some accounts limit certain transfers and withdrawals (known as convenient transactions) to six per month, so this isn't the best account for regular banking. ...
- Deposit and balance requirements. ...
- Fees. ...
- High interest rates. ...
- Flexible access. ...
- Federal insurance.
What is the safest money market fund?
| Rank | Fund | Minimum investment |
|---|---|---|
| 1 | Vanguard Federal Money Market Fund (VMFXX) | $3,000 |
| 2 | Schwab Value Advantage Money Fund Investor Shares (SWVXX) | $0 |
| 3 | PIMCO Government Money Market Fund (AMAXX) | $1,000 |
| 4 | Vanguard Cash Reserves Federal Money Market Fund Admiral Shares (VMRXX) | $3,000 |
Disadvantages of money market accounts may include hefty minimum balance requirements and monthly fees — and you might be able to find better yields with other deposit accounts.
All investments are subject to market risk, including possible loss of principal. Retail Money Market Funds: You could lose money by investing in the Fund. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it cannot guarantee it will do so.
Both CDs and MMAs are federally insured savings accounts, so they're equally safe.
Money Market Funds
Ultra-conservative investors and unsophisticated investors often stash their cash in money market funds. While these funds provide a high degree of safety, they should only be used for short-term investment. There's no need to avoid equity funds when the economy is slowing.
Cash equivalents are financial instruments that are almost as liquid as cash and are popular investments for millionaires. Examples of cash equivalents are money market mutual funds, certificates of deposit, commercial paper and Treasury bills. Some millionaires keep their cash in Treasury bills.
Instead, you can withdraw funds when needed, giving you control over your finances. So, your money is never really stuck. However, MMAs sometimes charge small penalties if your balance drops below a certain amount or you make more withdrawals than agreed.
Your Financial Institution May Limit Convenient Withdrawals
One of the biggest disadvantages of a money market account is that some financial institutions may put a cap on how many convenient withdrawals you can make each month.
Alternatives to money market funds, money market accounts, and savings accounts include: Certificates of deposit: CDs are term-based savings accounts that lock up your funds for a set time period in exchange for higher interest rates.
If the saver is able to meet the minimum balance, doesn't anticipate needing the funds anytime soon, and is interested in a higher interest rate, a money market account is the better choice.
Should I put all my money in a money market fund?
If you want to put your money in a high-yield account for a short-term savings goal, money market accounts have many benefits. If you want to withdraw money frequently or save for long-term goals like retirement, a checking account and investment account or high-yield savings account would be better options.
These new data on shadow NAVs represent a significant contribution to our understanding of MMF risks and the 2008 crisis. By lifting the veil of sponsor support, the data reveal how large and extensive MMF losses actually were. Indeed, one fund reported an NAV of $0.903, almost 10 percent below its “stable” $1 NAV!
The money is lost only when the positions are sold during or after the crash. As we know, the stock market is volatile and if it falls today, there is no doubt that will also rise sooner than later. In such a situation, patience is important.
When the value of the fund goes below $1, however, it's said to break the buck. Even though this is a rare occurrence, it can happen. Breaking the buck generally signals economic distress because money market funds are considered to be nearly risk-free.
Investors worry funds may 'break the buck'
As default concerns rise, investors fear money market funds may “break the buck,” which happens when a fund's so-called net asset value, or total assets minus liabilities, falls below $1.
