You can’t always get what you want…

Especially if you have money in a money market fund:

“…regulation will be implemented to enforce that “money market fund managers will have the option to ‘suspend redemptions to allow for the orderly liquidation of fund assets…

This means that the managers of mutual funds can refuse to allow you to sell your shares in a money market fund.  They won’t give you ‘your’ money back.

This is not something new.  If you have ever read the prospectus for a mutual fund, there is a sentence somewhere in there which states that the fund managers can suspend share redemptions in order to preserve the value of the fund.  In other words, they won’t give you your money back if the value of the fund falls rapidly.

That’s not all that is changing:

Among the changes, funds will have to switch to a floating share price instead of the current $1/share (hence the term breaking the buck). But the key part: “The SEC’s rule will require prime money market funds to move from a stable $1 per share net asset value, to a floating NAV. It also will let fund boards lower redemption “gates” and fees in times of market stress.”

Previously, if you bought shares in a money market fund, each share was valued at $1.  If the value of the fund increased, it wasn’t reflected in a new value per share.  Each share was still valued at $1; the increase in value meant that you now owned more shares at $1 each.

I am quite familiar with money market mutual funds.  I spent three years working for an accounting firm doing the accounting on mutual funds.  Most of the fund managers were prudent with investors’ money.  But there were a few who traded like they were on vacation in Vegas, including betting it all on black.  One manager of a fund sold all of the stocks and turned the fund into a money market fund for over 2 months.  Then in the middle of November he suddenly purchased certain high-tech stocks.  These stocks then doubled in value over the last month and a half of 1999, resulting in a return rate of 50% for the year.  The fund manager bragged to me about how he was the number two fund manager by return rate for that year.  Unfortunately, he wasn’t as lucky when the tech sector bubble burst in early 2000 and the value of the fund tanked.  But this experience taught me to never ever ever purchase shares of a mutual fund.

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Categories: Financial shenanigans

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