“Breaking the Buck”: A Risk Possible in Money Market Funds
photo credits to static7.businessinsider.com
For most investors, money market funds are the safest way to go for investing their cash. A money market fund functions like a mutual fund and it can also function as a savings account. However, no matter how safe this financial strategy may seem, there are still some risks involved in a money market fund.
One such risk is what is referred to as “Breaking the Buck.” This financial possibility is considered to be low risk, however. To understand what happens when a money market fund breaks the buck, one has to understand how a money market fund works.
Functioning as a mutual fund, a money market fund attempts to maintain an NAV, or a “Net Asset Value” of a dollar for every share. For instance, 1,000 shares is equivalent to $1,000. This money is invested in order to produce a profit for the investor. Money market funds, as stated by law, are allowed only in investments that are low-risk (investments typically lasting only 13 months), like government bonds.
Like most investments, however, money market funds are still subject to the risk of shares losing value and falling below $1 per share. A situation where the value of shares in a money market account falls below a dollar per share is referred to as “Breaking the Buck.” Because this is a rare occurrence, it is considered an important scale in the finance sector. So far, there have only been two instances where money market funds broke the buck. The first incident happened in 1994, where the value of shares fell to 96 cents per share. The second incident happened fourteen years after, in 2008.