The outlook on low-risk investments isn't so bad

— -- Investors who stash their cash in money market funds, certificates of deposit or fixed-rate annuities aren't looking for big gains. They just want to protect their principal and earn a little bit of interest.

That's why the sudden collapse of some of Wall Street's most venerable institutions has unnerved so many people. Is anything safe? Should you yank all your money out of the financial markets and stock up on canned goods?

That's probably not necessary. Here's a rundown on the outlook for low-risk investments:

Money market mutual funds.

Last Monday, the share price of the Reserve Primary Fund, a money market mutual fund, fell below $1, which means shareholders lost some of their principal. The fund cited losses from investments in Lehman Bros., which filed for bankruptcy protection last week.

While money market mutual funds aren't covered by the Federal Deposit Insurance Corp., they've long been considered nearly as safe as insured deposits. The funds typically invest money in short-term Treasury securities and IOUs from big companies.

In an effort to calm investors, the Treasury Department announced a temporary program to insure money funds. However, Treasury said Sunday that the insurance would be limited to funds shareholders had in money funds as of Sept. 19.

What about future investments in money funds? If the fund is offered by a large financial institution that manages money conservatively, "The odds of running into trouble are extremely low," says Karen Dolan, director of fund analysis for Morningstar, an investment research firm. Reserve Fund's management company may not have had enough money to replace the Lehman losses. But mutual fund behemoths such as Fidelity Investments and Vanguard have a vested interest in maintaining their money funds, she says, and will use their own money to prevent a fund from falling below $1 a share.

A fund's yield offers important clues to its management style. If a fund is offering significantly higher yields than its competitors and isn't charging lower fees, it's probably taking more risks, Dolan says. The Reserve Fund is a case in point. In Morningstar's database of 2,100 money market funds, the Reserve Fund had the largest trailing 12-month yield.


AIG is the largest issuer of fixed-rate annuities in the USA and the ninth-largest seller of variable annuities through banks. As a result, a lot of people who have their retirement savings with AIG have been rattled by the federal government's $85 billion bailout of the insurance giant.

Here's the problem: Ditching your annuities could trigger costly surrender charges. Marvin Feldman, president of the Life and Health Insurance Foundation for Education, says AIG's financial problems stem from risky investments made by its holding company.

AIG's insurance subsidiaries are "highly regulated and well-capitalized," he says.

If the insurance company failed, Feldman says, losses would be covered by your state's guaranty association, up to the maximum guaranteed by your state. Most states cover up to $100,000 in withdrawal and cash value for fixed annuities.

The state guaranty associations don't cover variable annuities. However, those annuities offer another type of protection for investors, Feldman says. Most variable annuities offer a choice of mutual funds, known as subaccounts. These are segregated accounts, Feldman says, which means that if the insurance company files for bankruptcy, creditors can't file claims against them.

Insured deposits.

The FDIC insures up to $100,000 per depositor in individual accounts, or up to $200,000 in joint accounts in which each account holder has equal withdrawal rights. Over the past 75 years, no one has lost a dime in insured deposits.

With credit drying up, banks are eager to attract customer deposits. While the average rate for a one-year CD was 2.47% last week, some banks are offering up to 4.5%, according to

Keep in mind, though, that if your bank fails and is acquired by another institution, there's no guarantee you'll continue to get the same interest rate until the CD matures, says Greg McBride, senior analyst for

If the new bank decides to lower your rate, you can redeem your CD, plus interest you've earned, without paying a penalty, McBride says.

Still, if you're a retiree who needs a predictable return on your CDs for the next few years, you might want to check out a bank's financial health before investing, he says. You can find information about a bank's safety and soundness at

Sandra Block covers personal finance for USA TODAY. Her Your Money column appears Tuesdays. Click here for an index of Your Money columns. E-mail her at: