How many money market funds have broken the buck?
Smith: Since their introduction in 1971, money market funds have broken the buck just two times. The first was in 1994, when a fund was liquidated at 96 cents per share because of large losses in derivatives.
On Sept. 16, 2008, the Reserve Primary Fund broke the buck when its net asset value (NAV) fell to $0.97 cents per share. It was one of the first times in the history of investing that a retail money market fund had failed to maintain a $1 per share NAV. The implications sent shockwaves through the industry.
While money market funds are not FDIC-insured, only two money market funds have failed. The first was a small institutional fund in 1994 and the other was the collapse of the Reserve Fund in September 2009, triggered by the Lehman Brothers bankruptcy.
A money market fund is a type of investment account that invests in funds that may gain and lose value, meaning you could lose part of your initial investment.
If the variance does exceed $0.005 per share, the fund could be considered to have broken the buck, and regulators may force it into liquidation. Buck breaking has rarely happened. Up to the 2008 financial crisis, only three money funds had broken the buck in the 37-year history of money funds.
Securities and Exchange Commission (SEC) rules allow money market funds to use special valuation methods to keep their NAV steady, whereas the NAVs of other kinds of mutual funds fluctuate daily. On occasion, a money market fund has “broken the buck,” meaning that its NAV fell below $1 per share.
By using an amortized pricing structure, the fund can manage its own activities and provide for redemptions. When the value of the fund goes below $1, however, it's said to break the buck. Even though this is a rare occurrence, it can happen.
The Bottom Line. Both money market accounts and money market funds are relatively safe, low-risk investments, but MMAs are insured up to $250,000 per depositor by the FDIC and money market funds aren't.
However, this only happens very rarely, but because money market funds are not FDIC-insured, meaning that money market funds can lose money.
Like other deposit accounts, money market accounts are insured by the FDIC or NCUA, up to $250,000 held by the same owner or owners. Money market accounts tend to pay you higher interest rates than other types of savings accounts.
Are money market funds safe in a recession?
Money market funds can protect your assets during a recession, but only as a temporary fix and not for long-term growth. In times of economic uncertainty, money market funds offer liquidity for cash reserves that can help you build your portfolio.
At least 99.5% of their assets are backed by the full faith and credit of the U.S. government. While money market funds aren't FDIC-insured, investments held in brokerage accounts (including money market funds) may be insured by SIPC.
Accounts of Charles Schwab & Co., Inc. are insured by SIPC for securities and cash in the event of broker-dealer failure. The Schwab Money Funds are protected as securities by SIPC. Below is a link to information that can be shared with the client at schwab.com.
Can I lose money when I invest in money market funds? Yes. Although money market funds seek to maintain a stable $1 share price, capital preservation is not guaranteed.
The Federal Reserve or the US Treasury might, to stop a panic, guarantee a $1.00 share value. As alex_686 notes, breaking a buck is the kiss of death for a money market fund. Redemptions are suspended and the fund is liquidated. The shareholders eventually receive some portion of their money - less than 100%.
Right now, investors can earn a competitive yield with low risk. "With short-term interest rates above 5%, money market funds have again become a meaningful part of the investment landscape," says James Dowd, CEO at North Capital.
Key takeaways
Disadvantages of money market accounts may include hefty minimum balance requirements and monthly fees — and you might be able to find better yields with other deposit accounts.
Many accounts have monthly fees
Another drawback to remember is that while they have high yields, money market accounts can also come with cumbersome fees. Many banks and credit unions will impose monthly fees just for the upkeep of your account.
You could lose money by investing in the fund. Although the fund seeks to preserve the value of your investment at $1.00 per share, it cannot guarantee it will do so.
Stability & safety
While not insured by the FDIC, the funds are required by federal regulations to invest in short-maturity, low-risk investments, making them less prone to market fluctuations than many other types of investments.
Are prime money market funds safe?
Although money market funds are typically regarded by most investors as relatively safe investments, it is possible to lose money by investing in such funds. They aren't FDIC insured, nor are they guaranteed by the U.S. government or a government agency.
A money market fund is a type of mutual fund that invests in high-quality, short-term debt instruments, cash, and cash equivalents. Though not quite as safe as cash, money market funds are considered extremely low-risk on the investment spectrum.
Symbol | Fund Name | Yield |
---|---|---|
SWWXX | Schwab AMT Tax-Free Money Fund | 3.03% |
VYFXX | Vanguard New York Municipal Money Market Fund | 3.03% |
DEIXX | Dreyfus Tax Exempt Cash Management Fund | 2.99% |
SWKXX | Schwab California Municipal Money Market Fund | 2.78% |
Money market accounts and savings accounts are equally safe places for consumers to keep their savings. However, it's important to open accounts at banks that are covered by FDIC insurance. You can check if your bank is FDIC-insured here.
There's no risk of you losing your deposit with a money market account. While money market accounts are considered low-risk accounts, that doesn't mean there aren't small risks to be aware of. The biggest risk a money market account poses is that your money may lose value over time to inflation.
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