Ask Dr. Don By Don Taylor, Ph.D., CFA • Bankrate.com

Insured deposits

Dear Dr. Don,
I have over $100,000 in a bank money market fund. The bank told me I need to put some of the money somewhere else since my funds are only insured up to $100,000. I was thinking about transferring some of it to a Vanguard Federal Money Market fund. However, it appears to me that it would not be Federal Deposit Insurance Corp. (FDIC) insured. How safe would it be for me to put my money in a money market mutual fund vs. a traditional bank fund?
Cindy Centurion

Dear Cindy,
Your bank is right, there's no reason to hold uninsured deposits in an FDIC insured financial institution.

The limit is $100,000 per depositor per financial institution. Using a combination of joint accounts and individual accounts is one way to get around the insurance limits at one financial institution.

Alternately, you can just spread the wealth among financial institutions by limiting your accounts at any one bank to $100,000 in deposits. The FDIC Web site is very helpful in explaining how to keep your deposits insured, especially when dealing with amounts over the FDIC insurance limit.

Money market mutual funds aren't insured. The industry over the years has done a very good job of "protecting the buck," meaning that the funds have preserved a price of $1 per share for each dollar invested.

Cash investments should be both liquid and relatively safe. Money market mutual funds do a good job on both counts.

Typically an investor chooses between taxable and tax-exempt funds and the different types of money market mutual funds do carry different levels of risk. The least risky would be money market mutual funds that invest in U.S. Treasury securities because these securities are considered to be free of the risk of default.

Protecting the buck is all about getting your initial investment back, and investing in U.S. Treasury securities does that for the investor. Money market mutual funds that invest in corporate, government agency, and municipal securities are still low risk but do carry more risk than insured deposits or investments in U.S. Treasury securities.

The Securities Investor Protection Corp. (SIPC) insurance carried by your brokerage firm protects you against a brokerage firm failure, but not against broker fraud or fluctuating security prices.

Shares of money market funds are often thought of by investors as cash, but are in fact securities. When held by a SIPC member in a customer's securities account, money market mutual fund shares are protected as any other covered security.

You didn't tell me a whole lot about your finances, but it may be time to talk to a financial planner about managing your money. Even without investing in the stock market, there's a world of places to put your money other than in low yielding CDs and money market funds.

One place to consider for at least some of these funds is Series I savings bonds. They currently are yielding 5.92 percent. There is a penalty for early redemption if you redeem the bonds within the first five years, so it's not right for money you need to have liquid, but the yield on these savings bonds adjusts every six months to reflect changes in inflation as measured by the Consumer Price Index (CPI).

Protecting the purchasing power of your wealth by investing in inflation-adjusted securities is a pretty savvy thing to do, and you won't have to lose any sleep over the risk level of the investment.

-- Posted: Sept. 24, 2001