How safe are money market mutual fund investments

Money market mutual funds are investment vehicles that are considered to be relatively safe. Most money market accounts are cash accounts and offer a safe haven for those who are concerned about putting their investment dollars at risk in the stock market. As the stock market has become more volatile, investors often flock to money market investments.

Money market accounts were initially created for institutional investors who wished to maintain cash accounts as a safe haven between trades. Money market accounts for the individual investor are comprised of numerous smaller investors who create a pool of cash for investment. These funds are similar to a bank savings account in that they are very liquid (e.g. able to be sold on short notice) and the principal remains the same unless all of the underlying investments lose one hundred percent of their value.

• T-Bills or treasury bills are one of the most popular investments that are used for money market mutual fund investments. These bills are denominated in amounts as little as $1,000 and are obligations of the government. Some money market funds pay a higher rate of interest because of the safety of the treasury bills in the money market fund portfolio.
• Certificates of Deposit (CD’s) are another common investment often in money market investment portfolios since they are also short term investments. CD’s offer flexibility as the funds are 100% guaranteed although they may be withdrawn immediately much like a checking account.
• Commercial paper is another common component of a money market fund. Commercial paper is typically issued by banks as a way of securing funding from other banks on a short term basis. These investments are typically very secure as they are backed by the full faith and credit of the bank. While bank failures do happen, commercial paper is issued only after a full review of the banks financial status.
• Bankers acceptance investments are often used in money market mutual funds. These are notes that are often taken by companies who do import and export trading and are backed by a bank. These are almost always short term investments and are considered safe. Even if the company who issues the note fails, the bank who guaranteed the investment generally makes good on the bankers acceptance .
• The euro-dollar is another investment that is used for money market mutual funds. This is not to be confused with the currency the Euro. Instead, the euro-dollar is a trading market that was established in London and are US dollar based investments. Many banks use these to avoid steep regulatory costs.
• The short term repo is another vehicle that are often found in portfolios for money market mutual funds. These are short term notes that allow banks to borrow money from other banks for very short periods of time, generally overnight. These investments are generally considered very safe.

Money market mutual fund investments are generally considered very safe. Unless you believe that all financial markets will fail at the same time, you can consider a money market mutual fund investment safe. While interest rates may not be extremely high, at a minimum, the principal portion of your investment will be there when you need it.