Money Market Fund Rates: When To Know Your Fund Is Losing

2008-10-01 10:24:59

( Financial )



It is a usual practice in the industry to tie money market fund rates with the federal fund rates. If you make investment on money market funds, then you may become wary when the Federal Reserve slashes interest rates because this only means that money market fund rates are also cut.

What to Watch Out for in Money Market Funds

Unlike certificate of deposits and other financial products offered by banks which are insured up to a certain amount, there is no guarantee in money market funds. However, money market funds, which consist of pooled money from different investors, are regarded as relatively safe because they are usually invested in government-issued Treasury bills, commercial papers, and other short-term investments.

Each share in money market funds is priced at a dollar. When the share price falls below a dollar because money market fund rates have also declined, you could lose some money here. Although this is used to be an unthinkable scenario in the past, it is no longer unusual these days. The uncertainty of the economy blows up some of the fund investments. While fund companies were willing to reimburse losses in the past, they are reluctant to continue it now.

Although money market fund rates are based on the federal rates, you do not actually get the same rate as that of the federal government. Fund companies usually deduct expenses to cover their administrative costs. Be sure to consider the annual expense ratio of money market funds when you shop around. Some firms may charge one-half percent, while others may impose one percent, in expenses. If you purchase your money market funds from financial advisers or brokers, then your funds may be charged with higher expense ratios because fund companies have to pay an annual commission to these middlemen.


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