Every once in a while, something really boring becomes really interesting. Vinyl flooring? So dull! At least, until it gives way and flips you into the basement. Wicker baskets? Boooring! Unless, of course, you bought them from a snake charmer.
Which brings us to money market funds, which are designed to be as exciting as two-for-one tapioca night at the
The first thing you should know about money funds is how ubiquitous they are. If you have a brokerage account, or a mutual fund account, or a corporate 401(k) plan, you probably also have a money market account.
What's particularly remarkable about money funds is that they have attracted
Why are they so popular? In large part, because they're convenient. Many money funds let you write checks on them, just as you would a bank checking account. If you decide to sell shares of stock, you can park your proceeds in a money fund until you decide what to do with them. And if you're a big institution, buying shares of a money fund can be more convenient than, say, purchasing money market securities on the open market.
What, then, is so ominous about a money fund? The funds invest in short-term, high-quality IOUs, such as Treasury bills, which are short-term loans to the government, and jumbo bank CDs, which are short-term loans to the nation's largest banks. No one is particularly worried about those investments.
But some funds -- known as "prime" funds -- invest in an array of other short-term loans that are normally safe.
The key word here is "normally." The day after
The reason it had broken the buck was because it held a fair amount of short-term
As a consequence of the
•Money funds aren't insured, and they never have been. The potential loss from a money fund is small -- the
•If you can't stand the possibility of a loss, invest in a federally insured bank account, and mind the limits on
•Some day, short-term interest rates will rise again, and money market funds will look more appealing than they currently do. But they're still a short-term investment, and will rarely, if ever, beat inflation over the long term.
Life is full of little surprises. But getting a surprise from your money fund is like discovering a skunk in your gym bag. You just don't want that. A few new rules to ensure investor safety won't hurt anyone.
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