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Updated: Thu, 06 Dec 2012 10:00:00 GMT | By Gail Vaz-Oxlade

Money market funds are not guaranteed

Money market funds are not fool-proof and investors should stop thinking of them that way.


The mutual fund marketplace has long positioned money market funds as a safe place to put your money while you're sitting on the sidelines. But since money market funds are neither insured by the Canada Deposit Insurance Corporation (CDIC), nor guaranteed by their selling companies, they're not fool-proof and investors should stop thinking of them that way.

Often people choose to use a money market fund as an alternative to a savings account because the banks pay very little interest on savings account balances. So money market funds are offered by staff as a good alternative. The problem is if you're looking for safety, no mutual fund can guarantee that. And while money market funds have traditionally been managed to be stable, it's not a sure thing. In fact, there's a move afoot to let the unit values fluctuate as with other mutual funds.

During the 2008 crisis, one money market fund south of the border "broke the buck." Its underlying assets were valued at only 97 cents, but the company backed the fund with its own reserves to prevent a further crisis from the resulting flood of withdrawals.

Since mutual fund prospectuses clearly state that the value of the units of mutual funds will fluctuate, no mutual fund company is under any obligation to make good your loss should the money market fund's unit value slip below what we've come to think of as the norm. U.S. mutual fund companies have begun to warn customers that if yields on short-term investments remain negative, as they have because of the ongoing European financial crisis, they won't be taking the hit for customers. Nope, it's every man for himself.

Canadians should take heed. The money market fund of the past 40 years is not the money market fund of today. If you're still thinking of them as guaranteed and as a good alternative to a lower-paying savings account, you might want to add what's happening south of the border to your info-mix before you decide.

So far the U.S. mutual fund industry has beat back regulatory efforts by the Securities and Exchange Commission chair to tighten regulations: for companies to put up more money in reserves or allow the unit price to float so investors understand what they're getting into.

While you might think that mutual fund companies want consumers to know what they're buying and the risks involved, the fact that money market fund unit values continue to be positioned as sure bets is clear proof that they'd rather customers believe the illusion they've created. If things take a turn for the worse, customers will soon learn that "past performance is no indication of future performance."

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