Traditionally, money market funds are a safe haven for investors.
But the Reserve Primary Fund became one of the few to display any risk when the money market fund's shares lost 3 cents, and went down to $0.97. Despite the news, “the fundamental structure of money market funds remains sound,” said Investment Company Institute CEO Paul Schott Stevens in a statement.
“Money Market funds historically are very stable and very safe investments and that’s a statement that’s still true today,” says Don Phillips, a Managing Director at Morningstar.
If you’re a 401(k) holder or an investor, then you probably have dollars stored away in a money market account. Here are some tips:
HOW MMFs WORKS FOR YOU.
Usually money market funds try to keep the net assets at $1 and you receive interest payments (in the 2% range) that are typically more than bank accounts, says Phillips.
HOW MMFs INVEST.
There are very strict rules on what money market funds can invest in, the investments have to be very liquid, or have very short maturities, says Phillips. A few examples: They are investing in very short term [sometimes 3 month] treasury bills or even shorter term federal debt instruments, says Stephen T. McClellen, author of Full of Bull.
“These funds are subject to strict regulation governing credit quality, liquidity, diversification, and transparency," says Stevens. "Securities held by money market funds must be judged highly credit-worthy by both objective and subjective tests, and Rule 2a-7 imposes strict requirements for diversification of assets.”
HOW SAFE ARE MMFs?
In the past, if a money market fund dipped below $1, the firm would provide capital to keep the fund safe. Only two money market funds have broken the dollar to date.
HOW DO YOU KNOW IT’S TIME TO LEAVE A MMF?
Once it dips below a dollar that kind of is the death knell of that money market fund, says McClellan. “They sealed their own fate [if it drops below $1], and you know all you need to know," says McClellan.
HOW SHOULD YOU SELECT A MMF?
The firm should be in the position to step up to the plate and make you whole for investment losses, says Phillips. Do they have deep pockets and a strong record of running the fund, aks Phillips. Think big firms like Fidelity and Schwab.