Are money funds safe now?

New federal insurance puts a partial safety net under money funds. Here's how to cut your risk even more.

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By Carolyn Bigda writer-reporter, Money Magazine

(Money Magazine) -- You normally wouldn't think twice about putting cash in a money-market fund. But when America's original money fund company, The Reserve, announced in mid-September that investors in its Primary Fund would lose money, the news sent a chilling reminder to savers - who keep $3.4 trillion in such funds - that no money fund is completely safe.

Money funds normally stay at $1 a share. But the Primary Fund's share value "broke the buck," falling to 97 because the fund had invested in commercial paper issued by failed investment bank Lehman Brothers. Scary headlines that followed triggered frantic withdrawals from other money funds.

Enter the U.S. Treasury. On Sept. 19, it put in place a new guarantee for money funds - essentially a type of FDIC insurance - promising that investors will get $1 back for every $1 invested, with no dollar limit. Whew!

The so-called Temporary Guarantee Program will last only three months but can be extended into 2009 if needed. However, it applies only to cash that was in money funds as of Sept. 19, and not all money funds may choose to sign up. That means you still have some work to do to stay safe.

What to do now

Call your money fund. Though funds aren't required to disclose participation, most will do so. Schwab and BlackRock, for example, have said they intend to buy the insurance.

Go for big financial firms. Even if your fund participates, new money will not be insured. To be safe, stick to financial firms such as Vanguard, Fidelity and American Funds that have the financial resources to preserve the $1 share value in their funds.

Look for low fees. The average expense ratio for money funds is 0.6%. Look for a fund whose fees are lower: It won't have to make up for costs with high-yielding, risky investments.

Don't chase yield. The average yield for taxable money funds is 1.9%. If you see one whose yield is much higher, that could be a sign that it's taking too many risks.  To top of page

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