FYI: Limiting one’s exposure to volatility is a core tenet of diversification. Money market funds help you do just that by investing in low-risk securities.
A money market fund is a type of fixed-income mutual fund that invests in debt securities with short maturities and minimum credit risks. As such, it is considered one of the least volatile assets on the market.
Investments that exhibit low volatility are less likely to generate market-beating returns, but they are necessary to ensure that your portfolio is well balanced. Depending on your risk profile, money market funds may comprise a significant portion of your portfolio.
Shortly after the 2008-09 financial crisis, money market funds had more than $3.3 trillion in assets under management, according to the U.S. Securities and Exchange Commission. Before the fall of Lehman Brothers, no retail investor ever lost a penny investing in a money market fund, or so it was claimed.
When Lehman Brothers went bankrupt in 2008, $40 billion was quickly pulled from the Reserve Primary Market Fund – a New York-based fund manager specializing in money market funds. That amounted to half its asset base. To meet withdrawals, Reserve had to sell other assets into a plunging market, pushing shares to $0.97 each. In money market funds, investors lose principal when a share’s net asset value falls below $1.00.
Fast forward to 2019, money market funds had nearly $3.5 trillion in assets under management, with more than half allocated to government and Treasury funds. While another Lehman Brothers scenario doesn’t seem likely in the immediate future, there’s no guarantee a similar collapse won’t happen again. For this reason, it’s important to be cognizant of the risks associated with money market funds.
Regards,
Ted
https://mutualfunds.com/money-market-funds/risks-of-money-market-funds/
