New safety net for money market mutual funds

Last week the mortgage crisis had consumers fearing that one of their seemingly most stable investments, money market mutual funds, could become about as worthless as Enron stock. The company that invented the money market fund, Reserve Management, whose Primary Fund had $62 billion in assets as of Sept. 15, announced that it had only 97 cents in assets for every dollar investors had deposited.

This was significant because money market funds are generally believed to be as good as cash and keep their net asset values at $1 a share. Not to be confused with bank money market accounts—which are FDIC insured—money market mutual funds are not insured but are regulated to invest in short-term (generally) safe securities. The Reserve Primary Fund got into trouble with debt securities it held in now-bankrupt Lehman Brothers.

Soon after Reserve’s announcement, mass redemptions in the industry caused a fund that hadn’t lost money, the Putnam Prime Money Market Fund, an institutional fund, to close its doors. The U.S. Treasury stepped in to squelch some of those fears by offering to insure money market funds for one year.

The details are still unfolding, but as of now the Treasury will be guaranteeing both taxable and tax-exempt funds up to the amount shareholders had in them as of the close of business Sept. 19, 2008. It won’t cover enhanced cash funds, a variation on money market funds that seek higher yields. And a Treasury spokesperson told us that shareholders in the Reserve Primary would definitely not be protected under the Treasury plan, despite a statement on the fund company’s Web site saying that details of what will be guaranteed are not yet known.

The Treasury is expected to announce full details of the plan in coming days on its Web site. But the takeaway for consumers, says the Investment Company Institute, the mutual fund industry association, is to contact your fund company to find out what securities it’s holding. Some fund companies, like Vanguard and Fidelity, have posted the holdings of their money market funds in past days.

The ICI also notes that only two money market funds have ever lost money, and never more than 3 to 4 percent. But if you're still worried, bank high-yield money market accounts or short-term CDs can earn you just as much, if not more, than money market funds and don’t charge the annual expenses that money funds do.  You’ll also get the comfort of knowing they’re FDIC insured.—Chris Fichera