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November 14, 2011

Are money funds for you.

There has been an increased awareness about needed changes to money market funds from regulators, the investment community, the media, etc.
Money market funds were the vehicle of choice for many because they they were thought to be convenient, safe, liquid and paid a higher yield than was otherwise available.  Although they were not insured, they were structured to minimize losses.  Holding the value at $1 was a symbol of their safety.  They were considered safe because the value was stable.  They were not thought of as long term investments, primarily because they did not offer protection from inflation or fluctuations in the value of the dollar.
When the value of Primary Reserve Fund dropped below zero in 2008 red lights started to flash.  People started asking if the structure of money market funds was appropriate when the economy was under extreme and prolonged stress.  Interest rates in money market funds are minuscule.  Many funds waived some of their fees to keep a positive return.
It has been reported that at least half the funds hold European bank debt.  This has heightened the concern about money market funds.  That is, they have higher risks.  They have minimal yields, hold riskier debt and are not protected by insurance or any form of guaranty.
The funds have provided a source of short term funds for many businesses.  Historically they have been profitable for the funds .  Just because it is good for the funds and businesses that borrow from the money market funds does not mean they are good for the individual investor.  
Increasingly dividend paying stocks and short-term (and/or ultra short-term) bond funds are being considered as alternatives.  Before you take any action be sure you know what is best for you.  If you are looking for yield, you may be sacrificing safety and/or liquidity.  If this is part of your cash reserve, you may find yourself being forced to realize a loss to get the cash you need for short-term needs or those unexpected events that require cash. 
If you have not considered these issues, you should.  These issues should be reviewed periodically. 

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