Tuesday, September 30, 2008

Understanding M & M's

If you've been reading for awhile you'll remember that I was once in love with money market accounts. That was in February around Valentine's Day. It was also when this blog was still new and running on a different publishing vehicle--one that I can't be linked. Maybe I'll run it in a Friday Encore. But anyway, today I'm still enamoured with the MMA. Yes, even in this economy. Even when sprinkled among the news of bank failures and a bi-polar stock market are the ill-musings of money market funds. But MMA's and MMF's are not the same.

First let's understand the MMA. It's simple really. You'll find MMA's at most credit unions and banks. MMA accounts work a lot like a savings account, but with limited withdrawal capability and often higher minimum deposits and balance requirements. In exchange for the restrictions you'll get a higher interest return (APY) than regular savings. Usually the withdrawals are limited to 3 times per month, but if you need more you'll pay a fee for additional withdrawals. Most importantly the MMA is an insured account, so it's essentially risk-free. Usually you can write checks or access your account through an ATM card.

Okay now the MMF. The difference is more than just a letter. These accounts fall under investments and are not insured. These funds invest in highly liquid, safe securities such as certificates of deposit, government securities, and commercial paper (i.e., short-term obligations issued by corporations). They usually offer an even higher APY than MMA's.

The Gov steps in.
So, right now with the huge load of bad news on Wall Street the term Money Market Funds has been popping up. One of the reasons is that these funds are not insured and people are losing money. So the government came up with a plan to ease fears. The government has put in place fees that firms must pay if they wish to secure guarantees to protect investors in case a fund's underlying assets fall below $1 for each investor dollar put in - called "breaking the buck." Participation in the guarantee program is optional for funds. But really it would why wouldn't they join in? It makes them more appealing to customers.

But this is only a short-term safety net for MMF investors. The Treasury Dept has only committed to the program for 3 months. The hope is that after that time the stock market will return to normal and loss will be less likely in an MMF.

I still love safety.
Call me a coward, but I'm still a fan of the MMA. During times like this I like a guaranteed return.

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