Fraud and Misrepresentation

Think your money’s safe in the money market mutual fund? Are you feeling confident that you’ve just invested in the best money market funds? Don’t be so sure. Fraud occurs in all levels of an organization, and financial institutions are no different. Large financial companies such as WorldCom and Enron have been exposed for their fraudulent practices, and the trend still continues today.

The recent credit meltdown resulting from the global financial crisis that began in 2008 has also put the money market at a disadvantage. Take the Schwab brokerage firm, for example. Through mismanagement and failure to disclose underlying risks, this organization misled many investors about the conditions of the money market. It turns out that, unbeknownst to investors, their money was being used to fund securities connected to the sub-prime mortgage industry.

This is only one example of the many ways in which unsuspecting investors are being defrauded. Even some experienced investors are being misled into thinking that their money is going toward the best money market funds. Unfortunately, the SEC isn’t doing much to punish those responsible for white collar crimes. Until those responsible for the fraud and misrepresentation are held fully accountable and punished to the fullest extent, money market investors will continue to suffer.

Economy

While some insured money market funds (hint: there aren't any)might be able to withstand poor economic conditions and mismanagement, the return very rarely amounts to anything. Indeed, one of the biggest problems with even the best rated money market funds is that the interest and annual fees eat away at any potential returns.

There is also a misconception about money market funds. Investors mistakenly think that because the markets try to maintain a share price of $1 per share, there is no risk involved. This couldn’t be further from the truth. This is because money market funds are mutual, which means they represent a variety of assets owned by many investors. As such, they are subject to factors that could cause the price to drop below $1, such as poor management, other investors choosing to sell rather than keep their money in the fund, and so forth. This doesn’t happen often, but it has a few times, and more than likely will in the future.

Inflation and Fees

Even if the price does remain $1 per share, investors can still lose on inflation alone. Those who think that the best money market funds are the ones that involve small investments are incorrect. As of June 2010, institutions are allowed to charge additional fees to certain accounts if the balances are less than $5,000. Whether through fees or risk of inflation, it is becoming more and more difficult for investors to gain returns from the best money market interest rates.

Bank Accounts VS Mutual Funds

Sometimes people mistake money market mutual funds with money market savings accounts. These are significantly different from one another. The former involves investing in securities for short-term. These securities include government bonds, certificates of deposit, etc. The latter is an interest-bearing bank account that is insured by FDIC up to a certain amount. \

When it comes down to it, objectively speaking, there is no “best money market funds”, at least not in today’s economy, post global financial crisis. However, if you are going to invest in the money market, putting your money into a FDIC-backed bank account is overall less risky than putting money into a mutual fund.