After 40 mostly unexciting years, the Securities and Exchange Commission (SEC) has recently taken steps to tighten oversight of the $2.6 trillion dollar business of money market funds. This move comes after several regulatory shortfalls became apparent following the collapse of Lehman Brothers in 2008 and had consumer groups calling for change.
For this installment of Investing 101, we take a closer look at the size and scope of money market funds, their history, and what lies ahead if the new rules are adopted.
1) What is a money market fund?
"They were developed in the 1970s to help investors get a better return than they could get on bank deposits," says Phil DeMuth, managing director at Conservative Wealth Management. "It's the life blood of the economy. It is where big and small investors keep their cash."
In fact, according to the Investment Company Institute (ICI), there are currently more than 7,600 money market funds in operation, which account for about 22% of all mutual fund assets. By design, they invest in very short-term debt securities with the aim of delivering a slightly higher return than could be earned in a regular savings account — without taking on much risk or foregoing the ability to withdraw your money whenever you want.
But as DeMuth says, "Ultimately they involve putting together two things that don't go together very well." He goes on to explain that "a fixed $1 net asset value [the price each share is worth] that never varies, on the one hand, is tied to an ultra-short-term bond fund that does vary, on the other."Read More »from What Money Market Changes Mean for You