Money Market Article: Are Money Market Funds a Safe Investment ?

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Although historical stock market gains hover around 8 %, steep declining beark markets, such as the one we are experiencing in 2008, can result in extreme negative earnings for equities. Due to the recent credit crisis, stock market indices have experienced declines of up to 40 % year-over-year. Fortunately, during these tough economic times, there are financial instruments that actually yield a positive gain - the intruments that provide such gain are known as money market instruments. These instruments act as a capital preservation vehicle during bear markets, and also provide a great source of liquidity, since these instruments permit redemption in a couple of business days.

Money markets are debt securities of the shor-term variety (one year maturity or less), and are very liquid instruments, which can be cashed out of at any time. Their reputation is one of safety, and they typically issued by government, large corporations, or financial banking institutions. These funds are usually procured through bank accounts or through mutual funds.

Over the years, the rates of money market funds have moved up and down consistent with the interest rates of the times. Of late, interest rates for these funds have been at historical lows, since interest rates have been quite low the last couple of years. The value of a money market fund is always maintained at $ 1/share by default, with appropriate interest earned on it, based on the prevailing rate.

Although historically most government-based and corporate-based money market funds have not been guaranteed, bank-issued money market rates are almost always FDIC-insured. However, since the great credit crisis of 2008 has been bestowed up on us, the government has decided to pony up and insure all money market funds for at least a year, with a dedicated emergency pool of money that has been made available. Recently, a well-established multual fund, the Reserve Primary Fund, "broke-the-buck", when they couldn't meet the redemption requirements of the fund, after a mass exodus of investors took place. This breaking-of-the buck resulted from the fund holding debt that was exposed to Lehman Brothers, an institutional brokerage that went belly-up. Hence, the government decided to step in quell the storm, by insuring all money market funds, for a period of at least a year.

Since all money market funds are effectively insured now, it is a prudent time to park excess cash (or cash that you wish to preserve during the market downturn) in these funds. Moreover, it is your best bet to invest in bank-issued money market funds, which are FDIC-insured up to $ 500,000 (for joint accounts). These are rock-solid investments that will cater to capital preservation, and provide a very liquid stream of assets.

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