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Mutual Funds

Why the Cash in Your Money Fund Is Safe

Fund sponsors are migrating toward strong European financial institutions.

Questions about the safety of money market funds have lingered ever since the Reserve Primary Fund’s share price dropped below $1 in 2008 after writing off debt issued by Lehman Brothers, which filed for bankruptcy. Now investors have another worry: The ten largest prime U.S. money funds -- which may invest in short-term corporate and government debt -- have almost 50% of their total assets invested in European financial institutions, according to Fitch Ratings. Given the jitters over some European countries’ government debt, should you worry that the price of another money fund will drop below $1?

No, says Pete Crane, of Crane Data: “The trillions of dollars in assets and tens of millions of investors in money funds invite government intervention if it becomes necessary.” Fund sponsors themselves are migrating to the largest and strongest European financial institutions, says Viktoria Baklanova, a Fitch Ratings analyst.

Three of the biggest -- JPMorgan, Fidelity and Vanguard -- do not hold securities issued by financial institutions in the most vulnerable countries: Greece, Ireland, Italy, Portugal and Spain. JPMorgan and Fidelity also shortened the maturity of their funds’ portfolios to ensure the funds would have cash for redemptions. Vanguard shifted its foreign exposure to Australia, Canada, and European countries outside the euro zone. The top yielders in our tables have little or no exposure to euro debt.

If minuscule yields (the national average is 0.01%) still make you want to run for cover, FDIC-insured money market deposit accounts may be a better option. The top-ranked accounts yield 1.1%.