Money fund assets top $3.5 trillion as investors stash cash

"Better safe than sorry" has been the motto of many an investor over the last year. And one of the biggest beneficiaries of that cautious mind-set has been the money market mutual fund industry.

Assets in money funds just crossed the $3.5-trillion mark this week for the first time, according to Money Fund Report in Westborough, Mass. Investors added a net $22.4 billion to the funds in the seven days ended Tuesday, lifting total assets to a record $3.52 trillion, Money Fund Report said.

Year to date the funds have taken in a stunning $437 billion. Stock mutual funds, by comparison, have had net cash outflows this year. Stock fund assets were $5.8 trillion as of June 30.

Nobody’s getting rich off money funds: The seven-day average annualized yield on taxable funds now is a mere 1.84%, down from 4.76% a year ago. Money fund yields have plunged as the Federal Reserve has slashed its benchmark interest rate, in turn driving down returns on the short-term corporate and government IOUs that money funds own.

They don’t pay much, but the funds offer relative safety of principal. I used the word "relative" because there are no guarantees with money funds. But shareholders have assumed -- correctly, so far -- that if there was a danger of principal loss a fund's parent company would use its own capital to support the portfolio.

Over the last year, a number of fund companies have stepped in to ensure that their money funds’ share values stayed constant at $1. Some of the funds had owned short-term debt that suddenly plunged in value amid the credit crunch. The funds’ parents bought those securities from the portfolios to remove any threat of principal loss.

"By stepping in when they have, the companies have kept the comfort level up" for fund investors, said Connie Bugbee, managing editor of Money Fund Report.

By contrast, some customers of IndyMac Bank and other failed banks this year have found out the hard way that the government’s insurance limits on deposits are set in stone: If you’re over the limit, your money is in jeopardy if the bank goes under.

Still, even some money fund shareholders are playing it safer: The fastest-growing money funds this year are those that restrict their holdings to U.S. government securities, such as Treasury bills. Assets of those funds now total $924 billion, up 19% since Jan. 1, compared with a 14% gain in assets for the industry overall.