Are Money Market Funds Covered by FDIC?
An investment in a money market fund is not insured or guaranteed by the FDIC or any other government agency. Money market funds are considered to be among the safest types of investments since they invest in high quality, short-term debt securities, pay dividends that reflect short-term interest rates, and seek to maintain a stable Net Asset Value, called NAV, per share -- usually $1. However, it is possible to lose money by investing in a money market fund either through a decline in fund value or due to the impact of management fees when interest rates are low.
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Banks and Investment Products
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Just because investment products, such as money market funds, are offered by a bank, that does not mean they are insured by the FDIC. Investment products such as stocks, bonds or mutual funds, including money market funds, are not part of the banking system and are not insured by the FDIC. It is possible for a money market fund investor to lose money and for the fund valuation to fall below $1 per share.
What FDIC Insures
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FDIC was created by congress to create stability and build confidence in United States' banks following the bank failures during the Great Depression of the 1930's. Today, the FDIC insures the first $250,000 an individual deposits in a single bank, whether in a checking account, savings account or Certificate of Deposit. FDIC insurance previously covered only the first $100,000 of deposits. President Obama signed a bill in 2009 that raised coverage to $250,000 through 2013.
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Money Market Risks
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On September 16, 2008, the Reserve Primary Fund, a money market fund, announced that shares fell to 97 cents because of losses that the fund incurred when Lehman Brothers investment banking firm declared bankruptcy. This phenomenon, known as "breaking the buck," has only happened twice in the history of money market funds. As a result, investors withdrew $247 billion in 10 days from money market funds due to fears for the funds' safety. Although no more funds declined below $1, and investors did return to money market funds, they favored funds that invested primarily in US Treasury securities, which are considered the safest investments.
Temporary Legislation
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To return public confidence to money market funds, the United States Government offered a temporary insurance plan to mutual fund companies beginning in September 2008. For mutual fund companies that signed up for the plan, the Treasury Department guaranteed that the value of participating money funds would not fall below the standard $1 a share. In February 2010 the plan ended, but the Securities and Exchange Commission enacted permanent reforms to address problems with money market funds.
New Legislation and Investor Education
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Money market funds have always had small gains and losses called the "shadow " NAV or Net Asset Value. Fund managers preferred not to report the shadow NAVs as they occurred, expecting to average out to $1 per share over time. Starting in November 2010, the SEC requires funds to report shadow NAVs to the SEC every month; the SEC then discloses the reports to the public. Fidelity Investments and Vanguard oppose the change fearing the run on funds that happened in 2008 due to losses experienced by a single fund. The Obama administration believes that educating the public on the way money market funds work will improve perceptions of naturally occurring changes in funds' pricing and will provide more accurate information about risks to investors.
New Safeguards
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The SEC is also requiring money market funds to take precautions to safeguard the integrity of their holdings. Specifically funds are required to hold more assets in cash to more easily pay redemptions to investors who want to withdraw their money. Funds must also invest 97 percent of their assets into the highest rated securities to limit credit risks. Further, fund managers must reduce their exposure to interest rate risk and conduct periodic stress tests to insure the funds can weather higher redemptions, rate increases and credit quality changes in their portfolios. These changes will make money market investments even safer.
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