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How Your Money-Market Fund Just Got Safer
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What's the downside for investors in money- market funds?
With lower risk they could reap lower returns.
Peter Crane of Crane Data, which tracks money funds, predicted the fee would be passed along to investors, reducing the yield on their money-market investments. The size of the fee hasn't been announced.
For the week that ended Thursday, the average yield at the 100 largest money-market funds was 2.3 percent, Crane said
How easily funds could pass along the fee is an open question. If the fee is levied on fund managers and they want to recoup it from their shareholders, they would need to put the matter to a shareholder vote, said Mike McNamee, a spokesman for the Investment Company Institute. Alternatively, the government could let funds pay the fee directly out of shareholder assets.
What would trigger a payout on the federal insurance?
If the net asset value of a fund sank below $1 per share, where it's supposed to stay, the fund would be liquidated and investors would be made whole.
What about money-market deposit accounts?
Money-market deposit accounts are a different animal. They are insured by the FDIC. Some banks also offer money-market mutual funds, so take care to avoid confusing the two.
Why did the government do this?
To avoid the equivalent of a run on the bank -- and to keep a linchpin of the financial system functioning smoothly.
In recent days, confidence in money-market mutual funds was shaken. Two major funds encountered trouble. One announced it was devaluing shares after the value of its investments dropped. Another fund closed in a bid to limit losses to its investors.
According to the Investment Company Institute, money-market fund investors withdrew a record $169 billion during the seven-day period that ended Wednesday. Meanwhile, the market was freezing up for the corporate securities that are the bread and butter for many funds.
One of the safest havens in the financial markets, and one on which many businesses depend, was suddenly imperiled.
"If the steps taken today succeed in unlocking the markets, we have every hope and expectation that this insurance pool will never be drawn," said Paul Schott Stevens, president of the Investment Company Institute.
