Where can panicked investors turn when their equity funds are in free fall and uncertainty seems to be the order of the day?
Well, scores of investors have taken refuge in short-term bond funds and money market funds in recent months, as anxiety over the market's direction has taken hold. Inflows into lower-risk money market funds have risen sharply, with assets reaching a record $3.51 trillion. But the notion that funds like these are immune from market losses and liquidity concerns is being put to the test.
A double whammy
One such ultra-short bond fund, the Schwab YieldPlus Fund, has found itself caught in a death spiral in recent weeks. The fund is designed to act like a money market fund, but it seeks to enhance returns by investing in bonds with a slightly longer duration and a higher yield. Unfortunately, the credit crunch that has roiled financial markets has also burned this Charles Schwab
And this isn't an isolated case. Legg Mason
Investors can take away two important lessons from these events. First, even "safe" investments can lose money, and in certain environments, they can lose a lot of money. Even money market funds can run into problems -- we've seen ample evidence of that lately. Don't assume that a low-risk investment means no risk. There is no free lunch in investing, and you never get something for nothing.
Second, this is unlikely to be the last of the bailouts we will see in this sector. The credit squeeze will claim many more victims before it's all over. So don't be surprised to hear about more managers having to shore up their funds. We're not out of the woods yet, so brace yourself for more charges, writedowns, and downside surprises in the financial sector -- even in so-called "safe" investments.