Money Market Break The Buck

In recent years, investments of money market funds have become increasingly popular as investors became increasingly risk-averse. In particular, during the recent credit crisis, investors have discovered a sort of security investments in money market funds, as opposed to short-term bonds and traditional savings accounts. However, the decline in share price of First Reserve Fund (RFIXX) below the $ 1 ("breaking the buck") showed that money market funds are not the safest option for cautious investors .

money market funds use the money to buy a large pool of short-term bonds, which can include corporate bonds, government bonds or municipal bonds. Unlike other investment vehicles like stocks and bonds, mutual funds that are subject to price fluctuations, money market funds maintain a net asset value (NAV) of $ 1.00 per share. This gives investors the impression that the money market mutual funds have almost no risk.

Money market funds should not lose their value. Their short-term (290 days) provides a considerable level of safety in case of failure because, generally, the difficulties of companies do not arise in such a short period of time. Theoretically, if a company in financial difficulties who are willing to make a dangerous option, it would take over 290 days on market mutual fund money to exchange their shares at full value. However, the bankruptcy of Lehman Brothers in 2008, the Internet bubble and the implosion of Enron are striking examples of large companies that have defaulted on their debt overnight.

Money market funds are at risk because they are subject to various factors that may drive their price below $ 1 level. Breaking the bar implies that the returns investors are less capital invested. Indeed, falling prices of primary reserve fund to 97 cents per share showed that money market funds can lose value and be as illiquid as any other mutual fund.

For 2010, analysts can not accurately estimate when and if there will be another surprise related to money market investments. However, there are certain factors that may contribute to money market funds "breaking the buck" fence, which affect their value.

In particular:

a) assets decline Society

Since mid-2009, capital markets have been on an upward trend bull rally that many companies reported profits. On the other hand, however, the banking sector has continued to fail and the job losses continued to mount in several sectors. For 2010, the uncertainty is likely to limit investment, any new regulations for the protection of investors are likely to be implemented throughout the year. In such an uncertain and turbulent environment, firms may not be profitable enough to maintain a net asset value of $ 1.00 to their obligations. If the company whose securities the fund owns money market faces financial problems, the value of bonds will decrease causing a corresponding decrease in the value of funds held by each shareholder.

b) Investors buy simultaneously

The majority of money market funds are invested in short-term bonds that have maturity dates similar. If a large number of investors to exchange their money at the same time, it will create a major problem of liquidity in the market will lose the value of money market funds. Large redemptions can cause simultaneous money market funds to sell part of its assets before their maturity date. This can cause a decline in the value of the fund.

The truth is that "breaking the buck" happens all the time. Investors may not realize it, because it is not clear, but since they spend their after-tax money after inflation, it is certain that by taking into account the taxes and inflation, money market funds are losing their value. However, as it is more a technical thing, investors.