What Is "Breaking the Buck?"

Thursday, January 7, 2010

Money market funds are a form of mutual fund, which means they attempt to keep a net asset value (NAV) of $1 per share. $1,000 is equal to 1,000 shares, and vice versa. These funds are invested to produce a return for investors, but money market funds are required by law to invest in low-risk debts (no more than 13 months in duration), such as government bonds, which means they typically return less than equities. (For more insight, see Do Money Market Funds Pay?) What many people fail to understand about money market funds, however, is that low risk isn't the same as risk-free. Because these funds are still an investment, it is possible for shares to lose value and dip below $1 per share. In this case, the fund is said to have broken the buck, a crucial benchmark in the financial sector. While this is uncommon, it can and does happen, causing investors to lose money and fund managers lose their reputations. (See other risks of this investment in Are Money Market Funds Worth The Risk?) Money market funds have generally been thought to be as safe as cash. They work like mutual funds, yet can be dipped into like a savings account. Most come with no insurance and no guarantees but investors still flock to them as the ideal place to park their money. As of 2009, money market funds have "broken the buck" twice in their history, in 1994 and 2008, causing investors to lose part of their principal investments. So how does this happen? And are money market funds really that safe? Read on to find out. (For background reading, see Introduction to Money Market Mutual Funds.)

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