Currently there’s a lot of turmoil in the investment world with the housing market on the rocks and debt levels reaching higher than ever before. This is causing many investors to seek more secure positions with a lot less risk. Money market funds are considered some of the safest investments out in the open market that isn’t FDIC insured, so it’s only logical that investors seeking to minimize risk would put their money in money market funds. Many investment companies are now launching new money market funds that offer higher interest rates, however they aren’t as secure as they would like investors to think.
Traditionally money market accounts have been a very secure and liquid way to invest your money. You won’t earn a ton of money off of your investment, but you know that the money’s there if you need it. You can buy into a money market fund for $1.00 a share, and the investment company does their best to keep those funds at $1.00 a share and then let their investors pocket the dividends that come up. Money market accounts are often sold by mutual fund companies and stock brokers as a way to invest one’s money safely.
A number of mutual fund companies are now offering some investment opportunities that mimic money market accounts and offer better interest rates, however this additional interest comes with a lot of additional risk that mutual fund companies aren’t being very forward about. The way that they can offer 5% or 6% rates of return is that they are taking on more risky investments as part of the funds, such as stocks. Most money market accounts will yield consumers rates of return of 3% or 4% in the current market.
For example, Sentinel Management Group has $1.6 billion in investments of money market plus funds and aren’t allowing people to get to their money because the fund went down in value. The YieldPlus fund is down 5% right now, where as almost every money market fund that’s ever existed has stayed at a value of $1.00 a share.
People invest in money market accounts for their security and these money market plus accounts simply do not provide it. They take on too much additional risk for their investors. When looking at a money market fund, you can tell if it’s one of these impostors if they have the word “plus” in the name of the fund. Many people have money invested in these funds and do not realize the additional risk they are taking on.
If you have any money invested in a money market fund, go and look over your paperwork and make sure it’s a true money market fund. If instead your money is invested in one of these impostor money market plus accounts, consider moving your money to a CD, a high-yield savings account, or into a tax-free municipal bond. If you are in a high tax bracket, a tax free municipal bond is usually the way to go, otherwise a decent high-yield savings account will give you equivalent interest rates with no risk to speak of.