Money Market Funds Fall from Grace - TheStreet

Money Market Funds Fall from Grace

Money market funds are losing investors, who are flocking to the more secure safety of savings accounts.
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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) - Get Report

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.

No Need for Money Market Funds

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So, do they really need this insurance? If the fee is too high, many will opt out of the plan. Even if the fee is reasonable, the fund companies are likely to pass this on to the customers. Fund companies already charge customers other fees and expenses, further cutting into the supposed higher interest rate.

"The boards of directors of funds will be less likely to vote for it if the fee is too high," says Rachel McTague of the ICI.

Retail customers are already pulling back, as assets in retail money market funds decreased by $7.27 billion to $1.237 trillion. Customers are turning to bank savings accounts which are already insured by the FDIC with no extra fees or costs. According to

bankingmyway.com

, rates for savings accounts can vary widely, but in some cases are comparable to money market funds.

Investors should also realize that some companies that offer money market funds charge higher fees because the fund is actually run by another company such as

BlackRock

(BLK) - Get Report

. Many fund companies like

Janus Capital

(JNS)

,

AllianceBernstein Capital

(AB) - Get Report

,

Affiliated Managers Group

(AMG) - Get Report

and

Franklin Resources

(BEN) - Get Report

are all waiting to comment until they get more details of the program.

The rapid bank consolidation has some investors concerned about the safety of savings accounts, but regardless of bank takeovers, the FDIC insures accounts of up to $100,000.