Money Market funds infected by Subprime

Money Market funds were invented 37 years ago to offer investors better returns than bank savings account while providing higher degree of safety. The size of the money market funds as of today is around $2.5 trillion, of which most of the investments have been made in assets like US Treasury Bills, Certificate of Deposits (CDs), Short Term Commercial debts and such low risk investments.

However, due to the growing pressure of yielding higher returns to its investors, some of the largest money market funds today are parking a part of their cash into some of the riskiest debt instruments of the world: CDOs (Collateralised Debt Obligation).
CDOs are package of bonds backed with loans. However the soreness is caused by the fact that almost half of the loan belong to the subprime debt category.

Money Market funds with total assets of $300 billion have been invested in sub prime debt this year. There is danger owning even highly rated CDOs, who definitely contain subprime loans.
There are around 38.4 million money market funds in the US. People use money market both to hold savings and serve as an account to buy securities, however the prime motive of it is to maintain safety and reasonable rate of return.

Money Market Managers are required to determine that their investments are safe and have high credit ratings; however Money Market managers buy CDO commercial papers to boost returns and make their funds more attractive to investors, which in turn increase their income.


With the default growing and sub prime crisis transmitting its unhealthiness, the fund managers have found a scapegoat in the Credit Rating Companies such as S&P, Fitch, and Moody’s whose irresponsible ratings definitely cannot be overlooked, however the fund managers and the various fund houses employ some of the most perspicacious people who charge the most hefty emolument, how can they shrug their responsibilities completely on someone else’s shoulders?
Investing in firms with Price-Earnings ratio of more than 500, does not hold water even if the most premier Investment Bank of this world grades it with a “BUY” position.
Similarly lending money to poor people with a record of not paying their debts is risky, regardless of what rating a credit rating company gives on the bond issue.
This is more effective incase of money market funds, where investors treat them at par with bank savings account and the last thing they (investors) would want is their money being lost in subprime debt furor.

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Money Market fund is a mutual fund that invests solely in money market instruments. Similar to a mutual fund, it issues redeemable units to investors and must follow guidelines set out by the SEC. Money Market funds NAV (Net Asset Value) is also determined at the end of each day.
These funds have some special properties:
1) Safety: the instruments these funds invest in are by and large some of the most stable and safe investments.
2) Low initial investment: Money market instruments have large minimum purchase requirements, thereby dissuading the personal investors from buying them. However money market funds have lower minimum purchase requirements thereby easily affordable by small investors.
3) Fixed NAV: the NAV for money market funds is usually fixed at a constant value of $1 per unit, giving investors more flexibility than mutual funds.
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