Safe, secure investments are in demand now more than ever. As the global economy retracts investors are rushing to secure safe investments for their money.
When considering safe investments bank products that are FDIC insured usually come to mind: Certificates of deposit, savings accounts, money market accounts, and even checking accounts. Some investments that are also safe that may not come to immediate mind are fixed annuities and money market funds (not to be confused with money market accounts that are offered through a local bank).
Money market funds are not FDIC insured and are not offered by commercial banks. A money market fund is a mutual fund that invests in short term, ultra-conservative investments (government bonds, bank CDs, short term commercial paper, etc). They are regulated by law so that they may not invest outside of these two parameters.
While money market funds are not backed by the FDIC they are considered extremely safe. Losing money in a money market fund is extremely unlikely and almost never happens. In the 23 years of money market funds only twice has a fund lost money, a situation called “breaking the buck.” Due to the underlying short term investments a money market fund pays a dividend that is subject to change at any time.
The dividend that they pay is typically higher than a bank, FDIC insured, product, although this is not always the case.
The few times in which a money market fund has lost money the issuing company has stepped in to cover the loss. With the current state of the global economy this has happened more often than usual lately.
Money market funds are so safe that the federal government stepped in on September 19th of 2008 to insure all funds held in money market funds. In order for the money in money market funds to be federally insured it must have been on deposit in a money market fund on the date of September 19th, 2008.
So, are money market funds safe investment?
Yes, they are so safe indeed that the federal government stepped in to independently insure them. No one has ever lost money on a money market fund and they offer competitive rates of return for a liquid, short term, safe investment.
Money market funds offer liquidity (usually with a three day delay from when you request the money to when you receive it), a competitive, while variable, rate of return, and safety. It is hard to go wrong with a money market fund.