Given recent questions about money market funds, it seemed worthwhile to post a few links with comments.
Basic background on types of MMFs (from Vanguard):Money market reform: What you need to know
Aside from institutional MMFs, there are government MMFs, prime MMFs, and muni MMFs. Government MMFs keep 99.5% of assets in federal government securities, cash, and repurchase agreements backed by federal securities. They are considered the safest (but see below), and are not required to impose redemption restrictions in times of stress. Prime MMFs are taxable MMFs that don't meet the 99.5% requirement (e.g. holding corporate paper). Muni MMFs hold (mostly) state, municipal, and territorial (e.g. Virgin Islands) paper.
Splitting hairs on government MMFs, the safest are pure Treasury funds. While the funds themselves are not guaranteed by the Treasury, the underlying securities are. Other government funds may hold agency securities that are not backed by the full faith and credit of the government. See, e.g. Northern Trust US Government MMF
Non-Treasury funds may also hold repurchase agreements. These not only introduce another (small) level of risk (see this Schwab paper
) but are also not state tax-exempt. A few states (Calif., NY, Conn.) tax 100% of a MMF's income if too much of it comes from state-taxable paper like repurchase agreements.
Retail prime and muni MMFs must impose gates and/or redemption fees in times of stress. That's said to happen if a fund's percentage of "highly liquid" assets fall below certain thresholds. Except for muni MM funds, at least 10% of assets must be in cash, Treasuries, or securities that mature within one day. There's also a weekly threshold of 30% which applies to muni funds as well as to prime funds. https://www.sec.gov/news/press/2010/2010-14.htm
Because of the possible restrictions on redemptions, I would keep some cash in a bank or government MMF. At least enough for a couple of weeks, which is about as long as redemptions can be held up (10 business days).
Aside from liquidity, there's the risk of breaking a buck. "[G]overnment and retail money market funds are allowed to try to keep their NAV at a stable $1.00 per share. These funds do this by using special pricing and valuation conventions when valuing the fund assets. ... If one of these money market fund’s NAV deviates by more than half a cent from $1.00, the fund would have to re-price its shares to something other than $1.00, which is known as “breaking the buck.” Therefore, if it deviates by more than half a cent below $1.00 (as one money market fund did in 2008 due to losses in the underlying investments), investors in the fund will likely lose money."https://www.sec.gov/oiea/investor-alerts-bulletins/investor-alerts-mmf-investoralerthtm.html
Funds are now required to post their liquidity figures and their NAVs (out to four places) daily. So you can see how close they are coming to imposing redemption gates or breaking a buck. OJ asked about SWKXX. This is a good case study, and I suspect typical of muni MMFs these days. Its NAV has dropped
in the past week from $1.0002 to $0.9987. While still comfortably about 99½¢, the speed of the drop invites close monitoring. On the other hand, its weekly liquidity
has been quite stable.
One keeps hearing that "we're in uncharted territory." That's often an exaggeration, but in this case I believe apt. These are new disclosure and enforcement regulations. Combined with the precipitous drop in security prices, we are at a place we have not seen before.