US Money Market Funds
For decades, US Money Market Funds were marketed and sold as the ultimate safe investment. And for some time, they were. Only twice in 40 years did the value of a money market fund decline below the amount invested in it. Fund managers used to be very careful and conservative which debts they buy. Only the most secure debt was invested in, much of it issued by the federal government. Yields, though, were low. But the money itself was safe because the underlying debts were going to be paid back.
In recent years, some money market managers began to invest in riskier debt to pursue higher returns. When the credit markets deteriorated, a lot of this riskier debt was suddenly not necessarily going to be paid back, putting money market funds at risk. People began to worry that the good ol’ secure money market funds were in trouble and began to panic. To quell this problem, investment firms and the government moved to assure the safety of these investments. Investor losses did not take place and the panic subsided.
Presently, since they are investments in assets, the safety of money market funds depends on the quality of the assets. There are some corporations with debt that is not credit-worthy but there are also many corporations with credit-worthy liabilities. Today, the historically conservative attitude of money market managers has returned and money market funds are going back to their roots as boring but safe investments offering relatively low rates of return but almost no risk of loss. Investors who are concerned about the security of their money market funds need to understand this equation. If you see that one money market fund is paying 5%, while all the other ones are paying 4%, you can assume that the fundamental assets of the former involves more risk than that of the latter.
Money Market accounts, by contrast, are basically savings accounts which are FDIC-insured up to $250,000. They are just simply deposited and gain interest. They were not affected with the problems in the credit market.
As for US Money Market Funds, the apprehension of major losses turned out to be just uncertainties.