For those with too much money to run around and try to open FDIC-insured accounts at all of the highest-paying online savings accounts, money market accounts are the best way to protect your money. These funds are not foolproof and in a real economic crisis where the underlying assets decline in value dramatically or default, money market funds could and have lost value.
Currently, the best money market rates on this site are paying just under 3%.
I have a friend who is convinced that we are headed towards a credit crisis of epic proportions and who is willing to get a lower return by investing in so-called US government money market funds. These are money market funds that invest only in US government securities and therefore have all of their assets backed by the full faith and credit of the US government. They are presumably still safer than (or at least as safe as) municipal money market funds discussed on this website, but have a higher return (offset, at least to some degree, by the absence of the positive municipal tax attributes).
Currently, I understand that the the best rate of fthe US government money market funds is approximately 2%.
My friend recently discovered that these funds aren't as safe as he had thought when he opened the prospectus for a Western US government money market fund that he had invested in. It turned out that this fund, which was being hawked by certain large investment banking firms, has large exposure to government agencies such as Freddie Mac, Fannie Mae and even Sallie Mae.
Why get 2% return to take risk that is probably as great as those taken in a standard money market fund?
If you invest in a US government money market fund, you should be especially careful in the current environment to invest only in a fund that buys US treasurys, not these risky agency bonds.
Related Articles:
What Is a Money Market Fund by Sam Cass - Dec 28, 2007
Are Financial Reporters Getting the Facts Correct? by Sam Cass - Dec 28, 2007.
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