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How safe is your money market fund?

The billions of dollars in subprime losses are now tainting a mainstay investment vehicle whose safety consumers take for granted: the money market mutual fund. Bank of America, SunTrust, Wachovia and Legg Mason are among the institutions reportedly taking steps to prop up money market funds that contained worrisome securities. But how far will this crisis go before we get to the bottom of the subprime hole?

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In the latest issue of Money Fund Intelligence, its publisher, Peter Crane, president of Crane Data LLC, writes, "The asset-backed commercial paper crisis of 2007 is beginning to rival 1994's derivative crisis as the most dangerous event in the 35-year history of money market funds."

In an interview with Bankrate, Crane ranked the 1994 crisis as a 10 on a scale of one to 10, and ranked today's situation an 8.

As dark as that may seem, while this issue is extremely important for investment managers, consumers who have invested in funds are not likely to lose money and shouldn't panic, says Crane.

"The danger here is that more money has been lost, and likely will be lost, by investors moving to (lower-yielding) Treasury bills," he says. "The damage from that is underrated, while the damage to money funds from structured investment vehicles

Structured investment vehicle

A structured investment vehicle, or SIV, contains asset-backed securities and bonds and attempts to profit from the spread between short-term and long-term rates. While SIVs have some inherent risks, most are safe because they're affiliated with the largest banks.
(SIVs) is overrated."

How to protect your money:
Don't base money market fund selection solely on yield or convenience.
Read the prospectus.
Understand the investments in the fund.
Know that money market funds are not FDIC-insured.

Know the underlying investments
However, consumers shouldn't be blind to the fact that investing in a money market fund does involve some risk. Too often people pick a money market fund based on convenience or yield instead of taking a look at the underlying investments. Many money market funds have sought higher-yielding investments such as subprime mortgage-backed securities. High-yield funds don't get those yields by investing in government securities. For instance, according to Money Fund Intelligence, the average yield for the top-yielding prime individual money market funds is 5 percent, while the average yield for the top-yielding Treasury individual money funds is 4.39 percent.

Standard & Poor's says there are approximately 2,000 money market mutual funds, of which some 1,200 are taxable. Within the taxable universe there are about 700 that can invest in commercial paper; the remaining 500 would invest in government securities.

Next: "You need to know what type of funds you own."
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