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How safe is your money market fund? |
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"You need to know what type of funds you own," says
Peter Rizzo, director of the fund rating group at S&P. "If it's
a Treasury or government agency then, obviously, it would not have
any commercial paper. But if it's a prime or a general purpose type
fund, it could have commercial paper, although not all do. Typically
the makeup of the 200 funds that we rate, that can buy commercial
paper, is 40 (percent) or 50 percent commercial paper and the rest
in repo (repurchase agreements), Treasury, agencies, bank paper
and a cornucopia of other money market investments."
Funds not FDIC-insured
Keep in mind that unlike money market accounts, money market funds
are not insured by FDIC or the Securities Investor Protection Corp.,
known as the SIPC. While no individual investor has lost money in
a money market fund, regulations prevent fund sponsors from guaranteeing
the $1 share price.
Herb Hopwood, president of Hopwood Financial Services in Great Falls, Va., says public perception remains a large part of the issue.
"They can put everything out there -- not FDIC-insured and the like -- but when (consumers) see Bank of America they think they're
absolutely safe and that a money market fund has no risk whatsoever."
Hopwood advises individuals to stick with funds backed by the larger organizations. Ironically, SIVs tend to be most concentrated in
the larger funds, but they're the ones best able to prop up a fund if there's a problem. Also, check the yield on your fund at least
once a week, he says. Significant drops could be an indication that the fund is taking a hit and is decreasing yield to make up the
difference.
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