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Mutual Funds

Money Funds: Still Safe After All These Years

Barring unimaginable financial catastrophe, you can count on sponsors riding to the rescue.

Every few years, it seems, a new financial crisis threatens the money-market-fund industry's nearly perfect record for stability. In 1994, it was the bankruptcy of Orange County, Cal. In 1997, it was the Asian contagion, followed a couple of years later by the collapse of the Long-Term Capital Management hedge fund.

Now, it's the subprime-mortgage blowup. Sponsors, including Bank of America and U.S. Bancorp, have had to bail out at least seven money funds that invested in exotic securities tied to mortgages made to less-than-stellar borrowers. Managers of these money funds thought they were buying supersafe instruments, only to see the housing collapse undermine their assumptions.

There was some risk that without assistance from their advisers, the net asset value of these funds might slip below $1 a share. Individual investors have never lost a penny of principal in money funds since their invention in 1970.

With more than $3 trillion in assets in money funds, sponsors will do what it takes to dodge a black eye. To avoid "breaking the buck," sponsors may have to absorb losses of up to $150 million, less than half of one day's interest income from all of the nation's money funds.

What if you want absolute safety? If you are really worried, says Peter Crane, founder and president of Crane Data, move to money funds that buy debt backed by the U.S. government, or to FDIC-insured bank accounts or certificates of deposit.