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The Fund Industry: How Your Money is Managed, 2nd Edition by Robert Pozen, Theresa Hamacher

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CHAPTER 8

Portfolio Management of Money Market Funds

Money market funds are the most conservative type of mutual fund—so it may seem counterintuitive that they are the center of controversy. But money market funds have a unique feature that has caused considerable concern: namely, they maintain a stable or constant NAV of $1.00 per share. While the NAV of other types of mutual funds fluctuate daily, the NAV of money market funds stays steady—usually, that is.

Because of the stable NAV, money market funds have become an important cash management tool for both institutions and individuals since their introduction in the 1970s. At the end of 2013, money market funds had more than $2.7 billion in assets, accounting for over 15 percent of the industry total.1

Money market funds have become substitutes for bank accounts—and that makes critics of these funds nervous. They argue that a stable NAV hides the risks inherent in the fund and emphasize that money market shares can indeed decline in value. In fact, investors in one money market fund saw the value of their shares decline during the financial crisis. While the losses from the drop in the NAV were small, the total cost of the event was much higher, because investors lost access to their money for an extended period while the fund was liquidated. In general, regulators are worried that money market funds are part of a shadow banking system that contributes to systemic risk in the financial system—and that they, therefore, need to ...

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