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Safety Concerns about Money Market Mutual Funds

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Safety Concerns about Money Market Mutual Funds

The Federal Deposit Insurance Corporation (FDIC) insures bank deposits up to $250,000 (retirement accounts up to $250,000), and the National Credit Union Share Insurance Fund (NCUSIF) does the same for credit union shares, but they do not cover money market mutual funds. This is a concern to some investors.

There is another option

You can, however, get a money market deposit account from a federally insured bank. This is a savings account that pays money market rates (which are usually higher than those of passbook accounts). Initial deposits for these accounts are often high, starting at $5,000 or $10,000. However, in recent years many institutions have lowered their initial deposit requirements, some to as low as $500.

Money market funds are considered very safe because of their low volatility and the creditworthiness of the issuers. Money funds also 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, certificates of deposit, and savings accounts pay.

There is the risk of inflation

A second concern with these funds is inflation risk. Real returns are affected or even overcome by inflation. Inflation can chip away at returns of money market funds because of their low returns, which are consistent with the returns of high-quality, short-term instruments.