Bank Deal: Earn 1.00% APY on an FDIC-insured savings account at Barclays Bank.
As many of you know, there’s a big difference between money market savings accounts and money market mutual funds. The former is held at a bank, and subject to FDIC insurance coverage. In contrast, the latter is typically held at an investment company or brokerage and, while money market funds are designed to maintain a price of $1/share, they’re still technically mutual funds. Thus, despite being functionally equivalent (more or less) to their bank-based counterparts, there’s always a chance that money market funds will “break the buck” (i.e., allow share values to fall below $1) such that you’ll wind up losing principal.
With that as a backdrop, I wanted to spend a bit of time talking about the U.S. Treasury’s recently announced money market mutual fund insurance program. In case you weren’t aware, the Treasury recently introduced this plan in an attempt to increase confidence in money market funds and combat a recent run by panic-stricken investors who were pulling their money out at an alarming rate. Unfortunately, while this plan guarantees that participating funds won’t “break the buck,” it’s still nowhere near as good as FDIC insurance coverage.
- The guarantee is limited only to funds that voluntarily participate. The good news here is that most major fund companies have thrown their hats into the ring, meaning that the vast majority of these sorts of funds are now covered.
- The guarantee only applies to money invested prior to September 19th. Because this was intended to stop people from liquidating their holdings, new contributions aren’t covered.
- Your investment returns may suffer as a result of this plan.While the funds companies are responsible for paying the costs of this insurance, it’s likely that they’ll ultimately pass it along to investors in the form of slightly higher expense ratios.
- The coverage is only temporary. As of right now, the coverage is slated to last only three months. While it’s possible that the Treasury will extend the plan, there are no guarantees.
So… Unless you already had money in place in a covered fund, the Treasury’s guarantee is a complete non-issue for you. In fact, it could be viewed as somewhat of a negative in light of the fact that participating companies will have to pay a bit extra for the coverage, and those costs will ultimately come out of your pocket. This is exactly why Fidelity and Vanguard both dragged their feet before agreeing to participate. Both companies are extremely well capitalized, and neither one saw this as a necessary step to protect their funds.
If you’re concerned about the preservation of capital, you would be well advised to stick to bank accounts that are covered by FDIC insurance (note that FDIC coverage was recently increased to $250k), or credit union accounts that are protected by NCUA insurance.
- How to Become a Millionaire
- How to Get Out of Debt
- The Best Dollars I've Ever Spent
- How Our Estate Plan is Structured
- How We Paid Our Mortgage In Less than 10 Years
- Money Making Ideas
- How to Manage Your Asset Allocation with Multiple Accounts
- Consumption Smoothing - Save While the Saving's Good
- How to Save on Groceries
- How Much Life Insurance Do You Need?
- Eleven Great Books About Money
- Dave Ramsey is Bad at Math (692)
- Dish Network Customer Service SUCKS (534)
- $8,000 Homebuyer Tax Credit (429)
- Pay Off Mortgage Early or Invest? (424)
- How to Claim the First-Time Homebuyer Tax Credit (352)
- Termite Control: Sentricon vs. Termidor (325)
- How Much Should You Pay a Babysitter? (284)
- Ethanol Blended Gas = Lower Mileage? (272)
- Reduced Credit Limits? Share Your Experience (256)
- $15,000 Homebuyer Tax Credit (242)
- Buying Furniture off the Back of a Truck (227)
- Will Mac OS X Lion Kill Quicken 2007? (191)