Are Money-Market Funds Safe?

A freeze on the Reserve Primary Fund puts others under scrutiny.


Consumers looking for a safe place to store their money and also earn interest have long turned to money-market funds, which invest in short-term bonds and are usually considered virtually risk free. But this week's news of Lehman Brothers' bankruptcy and the federal government's bailout of American International Group called the safety of such funds into question. At least one, the Reserve Primary Fund, lost value, partly because it held Lehman bonds.

But that doesn't mean consumers with savings in money-market funds should cash out and store their money in an FDIC-insured bank account, which usually pays much lower interest rates. It does mean, however, that it's a good time to check out the details of how your money-market fund is managed and what kind of securities it holds.

Yesterday, many brokerage firms, eager to soothe anxious customers, issued statements explaining just where their money is. Vanguard, for example, said its largest money-market fund, the Vanguard Prime Money Market Fund, has over half of its assets in Treasury and federal agency securities and about a third in certificates of deposit, all of which are considered safe. It also said that the fund has no exposure to either Lehman or AIG.

Fidelity put out a series of questions and answers that emphasized the company's confidence in the safety of its money-market funds. The funds have no exposure to Lehman and modest exposure to AIG, it said.

In addition to examining where funds invest their money, Morningstar recommends being wary of funds that pay above-average yields, as the Reserve Primary Fund did, because it may mean the managers are taking on extra risk. (The Reserve Primary Fund paid about 4.04 percent, compared with the average of 2.75 percent.)

Do you have concerns about the safety of your money? Share them here , and we'll try to look into them.