Hi! Thanks for the interesting question.
Any investment vehicle will carry with it some sort of risk.
One of the safest investment instruments out there are money market
funds. The reason for this is their very low volatility and the
creditworthiness of the issuers.
“Money market funds are considered very safe because of their low
volatility and creditworthiness of the issuers. Money market mutual
funds tend to have low overhead costs. These savings are ultimately
passed on to investors in the form of yields that are higher than what
money market deposit accounts, CD's and savings accounts pay.”
The risk for money market funds consists of non-coverage by the FDIC
and inflation concerns.
“The Federal Deposit Insurance Corporation (FDIC) insures bank
deposits up to $100,000, but does not cover money market mutual funds.
This is a concern to some investors. You can, however, get a money
market deposit account from a federally insured bank. This is a
savings account that pays money market rates (usually higher than a
passbook account). Initial deposits for these accounts start at $5,000
or $10,000.”
“A second concern with these funds is inflation risk. Real returns are
affected or even overcome by inflation. Because returns in a money
fund fluctuate greatly, inflation can chip away at returns that happen
to be low in a given year.”
These were taken from the Ameritrade website which has a good primer
on Money
Market Funds.
“Money Market Mutual Funds”
http://www.ameritrade.com/education/html/encyclopedia/tutorial4/t4_s6.html#safety
The CIGNA website meanwhile provides a more in-depth but still easy to
understand explanation of the nature of money market funds.
“Safety of Principal: The primary appeal of money market funds is the
protection of the principal, since they invest in very low-risk,
fixed-income securities, and many of them are protected by industry
organizations such as the Securities Investor Protection Corporation
(SIPC).”
Another risk mentioned by CIGNA is of income and that credit risk
still exist even though a particular issuer is financially stable.
“Income Risk: This is the potential for a decline in the income
received due to falling interest rates. This type of risk is high with
money market funds because of the short-term maturities these funds
generally hold.”
“Credit Risk: Since there is no guarantee that a security's issuer
will fail to repay the principal and interest in a timely fashion, if
at all, money market funds do carry a certain degree of this type of
risk.”
You can read the whole risk assessment of money market funds in the
following link:
“Money Market Funds”
http://www.cigna.com/consumer/education/basics/moneymarket.html
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I hope these links would help you in your research. Before rating this
answer, please ask for a clarification if you have a question or if
you would need further information.
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Regards,
Easterangel-ga |
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