You Can Lose Money From A Money-Market Fund

-- by Dave Johnson

Money-market funds pay higher interest rates than bank savings accounts pay. Why is that? Have you ever heard that risk equals return? This means that the higher the risk, the higher the return. Money markets pay a higher return than banks. Yes, money-market funds are a riskier investment than a bank or a treasury bill.

If you have never thought about that, then this might come as a shock to you: You can lose principal in a money-market fund.

What does this mean? If you put $1000 into a money-market fund, and that fund is holding onto mortgage-backed securities, and those securities turn out to be worth less or worthless, you will not be able to get your $1000 back out of that fund. You might get less back, or you might get nothing.

This is a good time to have your money in places that are not very risky.

Update And speaking of risk, here is an article about money-market funds investing in the riskiest of all: subprime loans: Subprime Infects $300 Billion of Money Market Funds, Hikes Risk

Posted by Dave Johnson at August 20, 2007 10:55 AM