How safe is your money fund?

The strains on the Reserve Primary Money Market Fund have prompted investors to ask whether their own money-market funds could be at risk. Money-market funds are not insured or guaranteed by the Federal Deposit Insurance Corp. or any government agency.

But fund companies have historically covered losses. Money-market observers expect that the losses Reserve's investors took will be an isolated event. "Though money fund investors will undoubtedly be shocked and nervous ... we believe Reserve will be an anomaly," Crane Data, a money-market news and data company, said in a posting on its Web site this week.

The best way to understand your fund's vulnerability is to know what types of securities it holds. The safest funds hold only U.S. Treasury securities, which are backed by the federal government. Some funds hold Treasury securities and government-backed securities from other issuers. Those other issuers could be institutions such as Fannie Mae and Freddie Mac. The most common funds are so-called "prime" funds, which invest in debt that isn't backed by the government. The differences in these funds show up in their yields: the safest, Treasury-only funds, yield less than prime funds. The Reserve fund, which was upended by its holdings of Lehman Brothers debt securities, offered a yield at least twice as high as many Treasury-only funds.

Investment companies that manage money market funds rushed to reassure investors this week. Companies such as Fidelity, Vanguard, BlackRock, Oppenheimer Funds, T. Rowe Price, Franklin Templeton, JP Morgan Chase, Legg Mason and Schwab issued statements stressing the safety of their products.

The big fund companies are more likely to inject their own money into a weakened fund rather than let losses wreck havoc on their reputation. "A failed money market operation can extract a steep toll on a firm's brand and future business," the investment research company Morningstar said in a report this week. "Investors stand to lose pennies on the dollar, but asset management companies that are in the money market business stand to lose everything."

Morningstar said it's best to stay in low-cost money-market funds from the big asset managers with the resources to maintain their funds. It also makes sense to stay away from the funds with the highest yields.

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