safety of vanguard money market funds

Vanguard offers nine money market funds. Five of them invest in the short-term obligations of the state governments of California, New Jersey, New York, Ohio, and Pennsylvania. The other four funds invest in the short-term obligations of the U.S. Treasury, and in agency or high-quality bank and corporate paper such as CDs, banker's acceptances and commercial paper.

History

The Vanguard Group of Investment Companies launched in 1974 as a reorganization of one of the oldest mutual funds, the Wellington Fund, which dates back to 1929. The Wellington Fund was known for its conservative approach to investing and for its having survived the financial crash and Great Depression. The Vanguard Group is still known for its conservative approach to investing its $520 billion under management in its mutual funds.

Function

U.S. securities law requires money market funds to invest only in low-risk securities because the funds are meant to provide a relatively safe, highly liquid investment option. All Vanguard money market mutual funds comply with this requirement. Though money market mutual funds are not backed by FDIC insurance or government guarantees, they often invest in securities that are, and Vanguard funds always have done so.

Types

There are several types of money market funds: Tax-free funds invest in short-term municipal debt securities while taxable funds invest in corporate short-term debt such as commercial paper and bank paper. Funds that invest only in short-term obligations of the U.S. Treasury and agencies such as Treasury bills and notes (Vanguard's Admiral Treasury Money Market and Federal Money Market). Balanced money market funds invest in a mix of all security types (Vanguard's Prime Money Market Fund).

Significance

The returns on investment in money market funds are low because they carry low risk. From 1999 to 2009, the Vanguard Funds paid average annual returns of 2.08 percent to 3.07 percent. During 2008-2009 financial crisis the returns ranged from 0.25 percent to 0.53 percent, in keeping with the experience of all money market funds.

Benefits

The Vanguard Funds have one of the lowest expense ratios of all the major mutual funds. Vanguard also is one of the largest money market mutual funds. That enables it to make up most losses its money market funds might unexpectedly take. So investors gain a measure of protection.

Considerations

During the financial crisis of 2008, Vanguard's money market funds had no exposure to Lehman Bros., Merrill Lynch, Morgan Stanley, Goldman Sachs, Washington Mutual, or AIG commercial paper. Not all money market funds can boast this record, but it is not an indication of Vanguard's future performance.