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How safe are money market mutual funds?

Posted by Cheryl Costa July 15, 2008 07:04 PM

PM asks:

I have Cash Reserve balances in some of my IRAs. How safe are these cash balances? Are they insured in any way?

Investors don't always understand this fine point, but Money Market funds are actually mutual funds so they are not insured against a decline in value like bank accounts are insured by the FDIC. However, Money Market funds are operated so that each share always maintains a constant value of $1 per share. While there is no guarantee that the share value would never drop below $1, fund companies would generally do everything within their power to prevent their money market fund from dropping below $1 per share -- something known in the industry as "breaking the buck".

No fund company would want to be the first company to "break the buck" so they would have a strong incentive to step in and use other assets to make the money market fund "whole" if there was ever a danger of the share price dropping below $1. Overall, these funds are very safe but you do need to be aware that none are guaranteed to never lose money.

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Local finance professionals share insights and advice on issues such as budgeting, managing debt, and retirement planning.
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About the contributors

Jill Boynton is co-founder of Cornerstone Financial Planning in Newington, N.H. Along with traditional financial planning services, Boynton provides analysis specifically for divorce.
Andrew Chan is the founder of Integrative Financial Advisors in Framingham. He provides comprehensive financial planning advice and investment management services. He has been an adviser for over 12 years and works with clients to integrate all aspects of their finances including investments, retirement, education funding, and tax planning.
Cheryl Costa is a managing director at AFW Wealth Advisors, which has offices in Natick and Purchase, N.Y. She advises clients on investing, education funding, and estate planning. She holds a master’s in business administration from Boston University.
Jamie Downey has been an accountant for more than 14 years. He's a partner at Downey & Co. in Braintree. Prior to joining the firm, he served as a manager in the audit department of accounting firm KPMG.

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