Money Market Funds Fall from Grace

Money market funds are not being viewed by investors as the safe havens they used to be.

The Investment Company Institute's most recent statistics said total money market fund assets decreased by $15.65 billion to $3.398 trillion for the week ending Sept. 24. This comes even as the Federal Deposit Insurance Corp. has offered an insurance program to the mutual fund companies to cover money market funds. The plan, which is light on details, would offer a money market insurance plan for a fee.

Money market funds are not covered by the FDIC in the event of a bank failure. For years, the product has been seen as a safe place to put cash and earn a bit more interest than a savings account at a bank. But as many funds' net asset value fell below $1 after the bankruptcy of Lehman Brothers and the federal government's bailout of American International Group (AIG Quote) earlier this month, nervous investors are reconsidering the risk factor. Is it worth taking the risk that a money market fund will go under in order to earn a few basis points more in return?

Most fund companies cover any imbalances in their money market products with profits from other funds. They'll add capital and shore them up in order to not break the $1 net asset value mark. Once the buck is broken, a fund company loses credibility and with so many fund companies vying for dollars, the last thing they can afford to do is let credibility slip.