Are money market funds safe during inflation?
The main negative of investing in money market funds is that you're not going to earn a large enough return to build wealth over time, or even outpace inflation. This fact makes these funds unsuitable for long-term savings goals such as retirement.
While some money market funds boast yields well above 4%, you don't want to put too much money into them, especially for long-term investing. Money market yields usually don't outpace inflation. And with the Fed planning to cut rates later this year, yields will likely decline.
They may come with the ability to pay bills, write checks and make debit card purchases. Disadvantages of money market accounts may include hefty minimum balance requirements and monthly fees — and you might be able to find better yields with other deposit accounts.
How safe are money market funds? There is little risk associated with money market funds. The U.S. Securities and Exchange Commission (SEC) mandates that only the highest-credit-rated securities are available in money market funds.
Money market funds can protect your assets during a recession, but only as a temporary fix and not for long-term growth. In times of economic uncertainty, money market funds offer liquidity for cash reserves that can help you build your portfolio.
If the variance does exceed $0.005 per share, the fund could be considered to have broken the buck, and regulators may force it into liquidation. Buck breaking has rarely happened. Up to the 2008 financial crisis, only three money funds had broken the buck in the 37-year history of money funds.
- Your Money Could Earn More Elsewhere. High-risk investments could provide better returns in the long run. ...
- Your Funds Are Uninsured. If you open a CD or a checking, savings or money market account from a bank, your funds are FDIC-insured. ...
- You Can Expect Fees.
There's no risk of you losing your deposit with a money market account. While money market accounts are considered low-risk accounts, that doesn't mean there aren't small risks to be aware of. The biggest risk a money market account poses is that your money may lose value over time to inflation.
If you want to put your money in a high-yield account for a short-term savings goal, money market accounts have many benefits. If you want to withdraw money frequently or save for long-term goals like retirement, a checking account and investment account or high-yield savings account would be better options.
Money market funds are usually considered to be safe investments, but it's important to remember that these investments are intended for the short term. With maturities of 13 months or less, the funds stay liquid and allow you better access to your money than longer-term investments.
Has anyone ever lost money in a money market fund?
However, this only happens very rarely, but because money market funds are not FDIC-insured, meaning that money market funds can lose money.
The Bottom Line. Both money market accounts and money market funds are relatively safe, low-risk investments, but MMAs are insured up to $250,000 per depositor by the FDIC and money market funds aren't.
Vanguard Treasury Money Market Fund
This fund only invests in US Treasuries and repurchase agreements insured by the federal government, making it among the safest in a category of relatively safe investments. The weighted average maturity of the fund's holdings is 43 days.
Money market funds are likely to keep growing if the Fed holds rates at their current level, or raises them further. I've used money market funds on and off for decades with no problems, and consider them to be fairly — though not entirely — safe.
1. Federal Bonds. The U.S. Treasury and Federal Reserve (Fed) would be more than happy to take your funds and issue you securities in return. A U.S. government bond still qualifies in most textbooks as a risk-free security.
When the market goes down, the total value of your investment decreases. In other words, the market value of your investment has changed, but you still own the same 100 shares as you did previously. Recall that investing in the stock market is a risky endeavor, and market values can change from moment to moment.
If the security accounts for 0.5 percent or more of the fund's portfolio, the fund also must report the default to the SEC. In addition, the US government's failure to pay its obligations could trigger a severe downgrade of its short-term credit rating by NRSROs.
While money market funds aren't ideal for long-term investing due to their low returns and lack of capital appreciation, they offer a stable, secure investment option for individuals looking to invest for the short term.
On Sept. 16, 2008, the Reserve Primary Fund broke the buck when its net asset value (NAV) fell to $0.97 cents per share. It was one of the first times in the history of investing that a retail money market fund had failed to maintain a $1 per share NAV. The implications sent shockwaves through the industry.
A money market fund might have once offered the highest return for your buck. But insured money market and savings accounts may offer competitive rates without the management fees, and with federal insurance for up to $250,000. So, be sure to compare the terms and rates with each.
Should I put my money in a money market fund or savings account?
The key difference between the two is that high-yield savings accounts are FDIC-insured, while money market funds are not. However, money market funds are considered very low-risk investments and may even have higher interest rates than high-yield savings accounts.
A money market fund is a type of investment account that invests in funds that may gain and lose value, meaning you could lose part of your initial investment.
At least 99.5% of their assets are backed by the full faith and credit of the U.S. government. While money market funds aren't FDIC-insured, investments held in brokerage accounts (including money market funds) may be insured by SIPC.
Stability & safety
While not insured by the FDIC, the funds are required by federal regulations to invest in short-maturity, low-risk investments, making them less prone to market fluctuations than many other types of investments.
Your assets are protected at Schwab. We work hard to make Schwab a secure and safe place for your money. Whether you hold securities like stocks, bonds, mutual funds, exchange traded funds, or money market funds in a Schwab brokerage account, or cash deposits in a Schwab Bank account, we have your assets protected.
References
- https://fortune.com/recommends/banking/what-are-money-market-funds/
- https://www.investopedia.com/articles/personal-finance/111516/5-mistakes-youre-making-money-market-accounts.asp
- https://www.cusocal.org/Learn/Financial-Guidance/Blog/Can-money-market-accounts-lose-money
- https://www.linkedin.com/pulse/what-does-recession-mean-housing-market-bestrealestatemarket-jsskc
- https://www.fphawaii.com/blog-01/where-safest-place-have-money-if-us-treasury-defaults-its-debt
- https://www.forbes.com/advisor/banking/money-market-account/money-market-account-vs-savings-account/
- https://www.troweprice.com/personal-investing/resources/insights/4-reasons-to-save-in-a-money-market-fund.html
- https://www.investopedia.com/terms/s/seven-day-yield.asp
- https://www.consumerfinance.gov/ask-cfpb/what-is-a-money-market-account-en-1007/
- https://www.ici.org/print/pdf/node/832226
- https://www.finra.org/investors/insights/money-market-funds
- https://www.centier.com/resources/articles/is-your-money-stuck-in-a-money-market-account
- https://www.cnn.com/cnn-underscored/money/are-money-market-accounts-safe
- https://www.nytimes.com/2023/04/21/business/money-market-funds.html
- https://cavanalhillfunds.com/insights-commentary/news/five-things-you-should-know-about-money-market-funds
- https://www.schwab.com/money-market-funds
- https://www.investopedia.com/financial-edge/0812/5-places-to-keep-your-money-when-you-dont-trust-the-banks.aspx
- https://www.forbes.com/advisor/banking/money-market-account/can-you-lose-money-in-mma/
- https://www.forbes.com/advisor/banking/money-market-account/best-money-market-accounts/
- https://www.nerdwallet.com/article/banking/money-market-vs-cd
- https://www.nolo.com/legal-encyclopedia/financial-institution-fails-acquired-29945.html
- https://www.bankrate.com/investing/what-is-a-money-market-fund/
- https://www.experian.com/blogs/ask-experian/pros-cons-money-market-funds/
- https://time.com/personal-finance/article/money-market-account-vs-money-market-fund/
- https://medium.com/@jay_voorhees/if-the-stock-market-crashes-what-happens-to-the-real-estate-and-mortgage-industries-bc08b50c67d0
- https://smartasset.com/investing/how-much-interest-can-50000-earn-per-year
- https://www.investopedia.com/terms/m/money-marketfund.asp
- https://www.goodreads.com/quotes/6646740-i-suggest-a-money-market-account-with-no-penalties-and
- https://www.investopedia.com/ask/answers/053016/how-safe-are-money-market-accounts.asp
- https://www.fidelity.com/learning-center/smart-money/money-market-vs-CD
- https://www.mutualfunds.com/fixed-income-channel/prime-money-market-funds-extra-yield-opportunity-or-a-risky-bet/
- https://corporate.vanguard.com/content/corporatesite/us/en/corp/articles/tried-true-money-markets-get-boost.html
- https://www.bankrate.com/banking/mma/money-market-account-advantages-and-disadvantages/
- https://smartasset.com/checking-account/how-does-a-money-market-account-work
- https://www.forbes.com/advisor/banking/money-market-account/are-money-market-accounts-safe/
- https://www.gsam.com/content/dam/gsam/pdfs/us/en/miscellaneous/GLM/money-market-yield-return-defs.pdf?sa=n&rd=n
- https://www.fool.com/the-ascent/buying-stocks/articles/will-you-lose-your-treasuries-if-the-us-defaults-on-its-debt-suze-orman-has-an-answer/
- https://www.statista.com/statistics/312660/us-state-and-local-government-debt-outstanding-by-state/
- https://www.sofi.com/learn/content/can-a-certificate-of-deposit-cd-lose-value/
- https://www.cnn.com/cnn-underscored/money/pros-and-cons-of-money-market-accounts
- https://en.wikipedia.org/wiki/Money_market_fund
- https://www.investopedia.com/ask/answers/12/safest-place-for-money.asp
- https://www.bankrate.com/investing/best-money-market-funds/
- https://www.latimes.com/compare-deals/banking/savings/7-percent-interest-savings-accounts
- https://www.investopedia.com/articles/economics/09/money-market-reserve-fund-meltdown.asp
- https://www.cnn.com/cnn-underscored/money/best-money-market-mutual-funds
- https://www.experian.com/blogs/ask-experian/dos-and-donts-of-saving-during-recession/
- https://time.com/personal-finance/article/what-is-a-money-market-account/
- https://www.investopedia.com/best-money-market-accounts-5096917
- https://www.investopedia.com/articles/mutualfund/08/money-market-break-buck.asp
- https://www.npr.org/transcripts/1178221917
- https://www.schwab.com/legal/account-protection
- https://www.schwab.com/learn/story/what-are-money-market-funds-and-how-do-they-work
- https://fortune.com/recommends/banking/pros-and-cons-of-money-market-accounts/
- https://am.jpmorgan.com/us/en/asset-management/liq/resources/investment-academy/evaluating-risk/Money-market-fund-risks/
- https://www.investopedia.com/articles/mutualfund/08/money-market.asp
- https://www.bankrate.com/banking/savings/money-market-vs-savings-accounts-vs-cds/
- https://investor.vanguard.com/investor-resources-education/mutual-funds/what-are-money-market-funds
- https://www.fidelity.com/mutual-funds/mutual-fund-spotlights/money-market-funds
- https://money.usnews.com/investing/articles/best-investments-during-a-recession
- https://www.bankrate.com/investing/hysa-vs-money-market-fund/
- https://www.forbes.com/advisor/banking/money-market-account/money-market-account-vs-money-market-fund/
- https://smartasset.com/investing/how-much-interest-does-10000-earn-in-a-year
- https://smartasset.com/financial-advisor/where-do-millionaires-keep-their-money
- https://www.investopedia.com/articles/mutualfund/07/money_market_savings.asp
- https://boldergroup.com/insights/blogs/invest-funds-recession/
- https://www.bankrate.com/banking/money-market-vs-cd/
- https://investor.vanguard.com/investment-products/money-markets
- https://fortune.com/recommends/banking/cds-vs-money-market-accounts/
- https://www.investopedia.com/terms/b/breaking-the-buck.asp
- https://www.creditkarma.com/financial-planning/i/how-to-plan-for-recession
- https://www.fool.com/investing/stock-market/basics/crashes/what-happens-if-stock-market-crashes/
- https://abcnews.go.com/Business/stock-market-drop-debt-ceiling-begin-days-experts/story?id=99537039