Has anyone ever lost money in a money market mutual fund?
However, this only happens very rarely, but because money market funds are not FDIC-insured, meaning that money market funds can lose money.
All investments are subject to market risk, including possible loss of principal. Retail Money Market Funds: You could lose money by investing in the Fund. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it cannot guarantee it will do so.
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.
It's technically possible to lose money in a market account, but not in the same way you can lose money in an investment account. Depending on the terms of your money market account, you could lose value to fees and inflation.
While money market funds are not FDIC-insured, only two money market funds have failed. The first was a small institutional fund in 1994 and the other was the collapse of the Reserve Fund in September 2009, triggered by the Lehman Brothers bankruptcy.
There are two main types of liquidity risks faced by money market funds: funding liquidity risk (if the fund's liquidity is insufficient to meet redemptions) and market liquidity risk (if market volatility forces funds to sell securities below the mark-to-market price in order to meet large redemptions or maintain ...
Some disadvantages are low returns, a loss of purchasing power, and the lack of FDIC insurance. A money market fund can be ideal in some situations and potentially unwise in others. If you're close to or in retirement and need some of your money soon, a money market fund can make sense.
There is no direct way to lose money in a money market account. However, it is possible to lose money indirectly. For example, if the interest rate you receive on your account balance can no longer keep up with any penalty fees you may be assessed, the value of the account can fall below the initial deposit.
Six to 12 months of living expenses are typically recommended for the amount of money that should be kept in cash in these types of accounts for unforeseen emergencies and life events. Beyond that, the money is essentially sitting and losing its value.
Money Market Funds
Ultra-conservative investors and unsophisticated investors often stash their cash in money market funds. While these funds provide a high degree of safety, they should only be used for short-term investment. There's no need to avoid equity funds when the economy is slowing.
How often do money market funds lose money?
Money market accounts are considered safe, low-risk investments. They earn interest and allow for easy access to your money. Your balance is also FDIC-insured, so it's unlikely that you'll lose money.
Money market accounts tend to pay you higher interest rates than other types of savings accounts. On the other hand, money market accounts usually limit the number of transactions you can make by check, debit card, or electronic transfer.
Can I lose money when I invest in money market funds? Yes. Although money market funds seek to maintain a stable $1 share price, capital preservation is not guaranteed.
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.
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.
In order to meet increasing redemptions, the fund was forced to sell a certificate of deposit at a 3% loss, triggering a restatement of its NAV and the first instance of a money market fund "breaking the buck". The Community Bankers US Government Fund broke the buck in 1994, paying investors 96 cents per share.
Many accounts have monthly fees
Another drawback to remember is that while they have high yields, money market accounts can also come with cumbersome fees. Many banks and credit unions will impose monthly fees just for the upkeep of your account.
Mutual funds are managed and therefore not ideal for investors who would rather have total control over their holdings. Due to rules and regulations, many funds may generate diluted returns, which could limit potential profits.
The records of stockbrokers who went bankrupt because of poor management or bad decisions might also deter us from investing in mutual funds. High Expense Ratios: Mutual funds involve an expense ratio. This expense ratio directly reduces the returns of the unit holder.
Fund | Expense Ratio | 7-day SEC yield |
---|---|---|
Vanguard Treasury Money Market Fund (VUSXX) | 0.09% | 5.3% |
Vanguard Municipal Money Market Fund (VMSXX) | 0.15% | 3.3% |
Fidelity Money Market Fund (SPRXX) | 0.42% | 5.0% |
Schwab Value Advantage Money Fund - Investor Shares (SWVXX) | 0.34% | 5.2% |
Is money market fund FDIC insured?
Money market funds aren't insured by the FDIC. Instead, they may be eligible for $500,000 coverage under SIPC when held in a brokerage account.
- Northern Bank Direct – 4.95% APY.
- All America Bank – 4.90% APY.
- Redneck Bank – 4.90% APY.
- First Foundation Bank – 4.90% APY.
- Sallie Mae Bank – 4.65% APY.
- Prime Alliance Bank – 4.50% APY.
- Presidential Bank – 4.37% APY.
- EverBank – 4.30% APY.
The Bottom Line
A money market account can be a great place to keep some of your cash savings. That can include your emergency fund or money you're setting aside for other financial goals. Interest rates tend to be higher when compared with traditional savings accounts, and liquidity isn't an issue.
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.
Money market accounts and savings accounts are equally safe places for consumers to keep their savings. However, it's important to open accounts at banks that are covered by FDIC insurance. You can check if your bank is FDIC-insured here.
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