Are Money Funds Safe Now?

Mutual Funds

Are Money Funds Safe Now?

Yes, and managers are making them even more secure.

Long accustomed to thinking of money-market funds as the stodgy gray suits in their investment wardrobe, investors were stunned last fall to discover those funds were more risqué than they appeared.

For the first time ever, a money-market fund with individual investors saw its net asset value drop below $1 a share.

To stanch the panic that ensued, the U.S. Treasury guaranteed money-fund assets for participating funds. Originally set to expire in April, the guarantee has been extended to September 19. But it still applies only to assets invested in money-market funds as of September 19, 2008.

Meanwhile, money funds are headed for a more comprehensive makeover. You can expect heightened regulation that would, among other things, limit portfolio risk, ensure minimum levels of cash to meet withdrawals, disclose more details about investments, and ensure that, in the event of a run, the first shareholders out the door won't be cutting their losses at the expense of those who remain.

Most funds already comply with most of the suggestions on the table. "The market has ruthlessly addressed the risk in money funds -- they've gone conservative," says fund tracker Peter Crane, of the newsletter Money Fund Intelligence. New regulations won't reduce yields any more than they've already been clipped by investing more conservatively, says Crane. What you're less likely to see: funds with floating net asset values, or $10-a-share NAVs.