Q: My money market fund can invest up to 20% of its assets in asset-backed securities. Can it buy these bad subprime loans, too?
A: Money market mutual funds are supposed to be among some of the safest places investors can put their money. Investors who don't want to risk their cash in the stock market but want better returns than they can get from savings accounts, often turn to money markets.
That's why there was so much panic on unfounded fears that the credit crunch was starting to hurt money market funds, according to a story by USA TODAY's John Waggoner, which you can read here.
The scare was set off on reports that Sentinel Management Group, whose name is similar to that of a money market mutual fund, froze assets and said it couldn't meet redemptions. But that Sentinel is not a money market mutual fund, as Waggoner explains in his story. It is "a privately managed investment pool that caters to hedge funds and commodity traders."
Money market funds aren't allowed to own securities that mature, on average, in longer than 90 days. Sentinel, which is more like a bond fund, had 79% of its assets in holdings that mature in eight years or longer, Waggoner reported.
So what about money market funds? Don't lose sleep. As long as the funds are doing what they're required by law to do, investing in widely diversified baskets of short-term securities, you shouldn't have anything to worry about.
In fact, the types of securities money market funds are investing in — government-backed short-term securities — have held up well during the credit fears that have gripped the market.
My only caution would be to double-check to make sure your money fund is truly a money market fund. Check the fund's prospectus and make sure it is invested only in short-term, highly rated securities.
Matt Krantz is a financial markets reporter at USA TODAY. He answers a different reader question every weekday in his Ask Matt column at money.usatoday.com. To submit a question, e-mail Matt at firstname.lastname@example.org.