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How Safe Is Your Cash?

Investors often ask the question, “Are money-market funds FDIC insured like certificates of deposit and savings accounts?” The short answer is no, money-market fund holders don't have the same guarantees that holders of CDs, money-market deposit accounts, and checking and savings accounts have. However, money-market fund investors were accorded extra protections when the financial crisis happened in 2008. At that time, a large money-market mutual fund, the Reserve Primary Fund, "broke the buck," meaning its holdings dropped in price, which in turn caused the fund's net asset value to drop lower than $1. That event created panic selling among some holders of money-market funds, prompting the Treasury Department to start a new program, similar to FDIC insurance, for money-market funds. Under the Treasury's program, investors who owned money-market funds before Sept. 19, 2008 (the date that the Treasury introduced the program) were guaranteed to be "made whole" if their funds' net asset values dropped below $1. The Treasury's program expired a year later, however, meaning that the Treasury, FDIC, or any other entity do not currently insure assets in money-market mutual funds.

That said, the fact that money-market funds aren't insured doesn't mean you should automatically eschew them. Yields on nearly all cash-like vehicles are low across the board right now, but at other points in time, money-market mutual funds might provide better yields than you'd obtain with other cash products. In addition, money-market funds also offer daily access to your money, which is not an option for CD holders. Finally, there's the convenience factor: If you frequently move money into your long-term investments from your cash accounts, holding a money-market fund with your investment provider can make these transfers seamless.

Since the introduction of the first money-market fund 40 years ago, there have been a very small number of funds that have broken the buck; all the rest have maintained stable net asset values. And following the financial crisis, the Securities and Exchange Commission, which regulates money-market funds, imposed more stringent standards, instituting new requirements for liquidity, credit quality, and maturity.

If you do opt for a money-market fund for your cash holdings, take a common-sense approach to ensure that you don't get stuck with an outlier. As with all investments, be on high alert if a money-market fund offers an appreciably higher yield than competing funds and does not have ultralow expenses; that can be a red flag that it's taking more risks than its peers.

It can also make sense to stick with money funds offered by very large providers with extensive operations outside of the money-market fund business. Thus, in a worst-case scenario in which a money-market fund's NAV falls below $1, the provider could contribute the cash to make investors "whole." Finally, if you have a lot of cash on the sidelines, it may be worthwhile to spread your positions among multiple providers for diversification purposes; you might also consider splitting your cash assets among accounts that offer FDIC protection as well as those that do not.

An investment in a money-market vehicle is not insured or guaranteed by the FDIC or any other government agency. The current yield quotation reflects the current earnings of the money market more closely than the total return quotation. Although money markets seek to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in them. Before investing in a money-market fund, you should carefully read all of the fund’s available information, including its prospectus and its most recent shareholder report.