By BankingMyWay.com Staff
Money Market funds are normally seen as lower risk investments because they rely on short-term government and corporate securities to maintain a diversified yield.

They try to maintain a Net Asset Value (NAV) of $1.00 per share. If the fund falls below this amount (known as “breaking the buck”), some funds will step in and make up this amount until the market stabilizes. However, due to the recent economic crisis, even these funds have been in need of federal assistance to keep them stable.

In the fall of 2008, Lehman Brothers declared bankruptcy and the federal government decided to guarantee money market funds.  The guarantee is slated to last until September of 2009, in an effort to gain consumer confidence and to prevent investors from losing too much money. This move was significant because money market funds, unlike money market accounts, are not normally federally insured.

So How Much is Too Much to Invest?

Given market instability, is it wise to invest in money market funds that have otherwise been historically reliable?  Most brokers would still say that these funds are safe and reliable, particularly given government intervention in recent months. However, money market funds have never been the place to park a large amount of cash over the long term. Instead, money market funds are best used in the short term until the money is needed or is transferred to another account. For example, some long-term retirement portfolios can be invested in these funds until they are rolled into comprehensive accounts.

If you have a large amount of cash that you need accessible to you at any time, however, money market funds can be advantageous. How much is too much depends on your other liquid and rigid assets. Diversification is key in investing, so you should probably never maintain more than 10% of your assets in a money market fund over the long-term, keeping in mind that most funds require a $15,000 minimum deposit. Since the average going rate of return is only about .5% anyway, you can usually find much more effective ways to invest money, even in the short-term.

Tips for Smart Investing

• Diversify money fund holdings, don’t put all your eggs in one basket.
• Look for funds from larger money management firms like Fidelity (Stock Quote: FNF).
• Look at the overall cost of the fund before investing. Consider the yield, but also any account fees or penalties as well.

BankingMyWay.com offers a rate comparison calculator that can help you find the best rates in your area. If you are still learning about money market funds and similar investment options, you can also conduct background research on options that you find interesting or want to discuss with your financial professional.

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