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Money market funds weathering the storm

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"Consumers don't have to worry about losing money, but if financial institutions have large losses, well, eventually consumers pay every tab so it may come back to hit them with lower yields or higher fees."

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While some funds have encountered trouble, it's not stopping money managers and investors from yanking money out of stocks and pouring it into money market funds which look like a safe haven from the tumbling stock market. As a group, money market fund assets have grown 40 percent in the past year; nearly $300 billion have been added to date in 2008.

If you're really concerned about the safety of money market funds, stick with the very large brokerages and fund companies. It's not that their money funds are immune from SIV problems; it's that they're better equipped to handle losses and ensure that customers get their money back.

Be careful about chasing yield when it comes to money market funds in this environment.

"It comes back to why you have your money in a money market fund," says Hopwood. "You want liquidity and you want to get your money back. To take on more risk to get an extra 20 basis points of yield is insanity. If you're talking a money fund yield above 4 percent, that's a bit of a yellow flag out there now."

Crane agrees: "You don't want to be lured by specials that are considerably beyond the mean. With money market funds and cash-type investments, you want to take what the Fed gives you. You're not going to like it because the rates are low now on the fed funds and they're probably going lower. You might lose some money in yield, but the people who are getting hurt now got greedy."

Top-yielding retail money funds, according to Crane Data are:
Money market fund 7-day yield %

The average annualized seven-day current yield for the Crane 100 Money Fund Index is 3.39 percent as of Feb. 21, 2008. The current federal funds rate is 3 percent.

Bankrate.com's corrections policy -- Posted: Feb. 29, 2008
 
 
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