Money fund checkup is easy

PERSONAL FINANCE

November 20, 2007|By EILEEN AMBROSE

Some things, you're supposed to be able to count on. A mother's love. Fireworks on the Fourth of July. And the safety of your principal in a money market mutual fund.

That last one has suddenly started sounding a bit iffy.

Some banks and investment companies, including Baltimore's Legg Mason, are spending tens of millions of dollars to support their money market funds. The move is to assure investors that a fund's net asset value won't drop below $1 a share, something called "breaking the buck."

Money market funds don't guarantee they'll never break the buck. It's just not supposed to happen on an investment that's considered almost as safe as cash.

There's no reason to panic just because you own a money market fund. Cases of breaking the buck are rare. It happened once in 1994, and the investors that got burned then were institutions, not individuals. Industry experts also have a point when they say banks and investment companies aren't going to risk their reputations - and a mass exodus of customers - by allowing it to happen.

Still, it's always a good idea to know what you own, or in this case what your money market fund invests in. And if there's anything that leaves you tossing and turning at night, well, there are other investments you can switch to that offer comparable rates and a guarantee.

Money market mutual funds traditionally invest in short-term, high-grade debt. Funds now hold nearly $3 trillion in assets from investors who expect to get their principal back with interest.

Some financial institutions sought higher yields for their money market funds by investing in more aggressive securities issued by so-called structured investment vehicles.

SIVs got badly burned by owning soured mortgage debt and by fears that the mortgage market will worsen.

How do you know if you should be concerned about your money market fund?

One clue: If you selected the money market fund only because it had the highest yield, the fund could be souped up with some of this problem paper, says Margaret Jones, chief executive of investment adviser WCM Inc. in Minneapolis.

"You're only paid better than the market rate of interest if you're taking more risk. And that's the simple truth," she says.

To know for sure, check to see what the fund invests in.

You can find out by looking at the fund's annual or semiannual report, says Connie Bugbee, managing editor of the Money Fund Report. If you don't have these documents any more, the Securities and Exchange Commission posts the information online at www.sec.gov.

Remember, money-market funds invest in short-term debt that can have maturities of a month or so. By the time reports are printed or posted, they could be out-of-date, Bugbee says. Still, it will give you an idea of what the fund invests in.

You can relax if the fund invests only in securities backed by the full faith and credit of Uncle Sam. Nothing could be stodgier or safer.

If the fund is chock full of things you don't understand, call the money market fund's 800 number for an explanation. And if the answers don't leave you satisfied, you can always switch to another money market fund.

Look for one that's well managed and has a track record of steady, competitive rates over time, Jones says.

Or, if you really want to play it safe, find a money market fund that invests only in government-backed securities. The yield may be lower, but you'll sleep at night.

Another alternative is to move your money into a bank's high-yield savings account or money market deposit account, says Greg McBride, senior financial analyst with Bankrate.com.

"You will have the comfort of FDIC insurance while maintaining complete liquidity and still find yields north of 5 percent," he says.

But McBride adds that he doesn't think money-market fund investors have anything to worry about. "Financial institutions will move heaven and earth to keep the net asset value in their money funds at the $1 mark," he says.

Questions? Comments? Want to share your own financial tips with readers? Contact Eileen Ambrose at 410-332-6984 or by e-mail at eileen.ambrose@baltsun.com.

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