Transcripts

"Of Mutual Interest" - Money Funds

SUSIE GHARIB: In tonight's "Of mutual interest," a look at different types of money funds, so you can decide which is best for you. Here's John Waggoner, mutual fund columnist at "USA Today."

JOHN WAGGONER, MUTUAL FUND COLUMNIST, USA TODAY: Sometimes, events make you question the safety of things you take for granted. Are my airbags really protecting me? Should I fear my toothpaste? Now people are wondering if their money fund is safe and the answer is yes. But if you need the safety of an ironclad guarantee, then a money fund isn't for you. Money funds invest in short-term, high-quality IOUs. Unlike other mutual funds, whose share prices change daily, a money fund keeps its price at $1 every day. You buy at a dollar a share and you sell at a dollar a share. Your interest is paid in additional shares or fractions of shares.

But there are different kinds of money funds, just as there are different types of stock funds. A government-only money fund, for example, invests only in government securities, such as Treasury bills. A prime money fund gets somewhat higher yields by investing in high-quality non- government securities. Prime funds are in the spotlight because a favorite prime money fund investment, commercial paper, hit an air pocket this month. Commercial paper is very short- term debt issued by big, financially strong corporations, such as General Electric. But some commercial paper is backed by assets and sometimes, those assets are mortgages.

Some mortgages have run into trouble recently and the market for mortgage-related commercial paper dried up. Still, no money funds ran into any problems. A money fund's high yields and easy access has made it a staple of nearly every investment account. The funds have a sterling safety record. And living in fear of your money fund is a bit like living in fear of your socks. But no money fund comes with a guarantee and if that's what you need, then you should consider an insured bank account instead. I'm John Waggoner.