When discussing investment safety, it’s crucial to define what “safety” truly means. By doing so, investors can optimize their investment selection.
Safety can mean a low risk of permanently losing investment capital. For example, shareholders of Enron faced a complete wipeout following its accounting scandal, and Bed Bath & Beyond investors experienced similar outcomes following the company’s bankruptcy, delisting and share cancellation.
Another aspect of safety is the minimization of volatility. Even stable, well-established and defensive consumer staples companies experience share price fluctuations in response to market dynamics. Similarly, bond values can fluctuate due to changes in interest rates and credit conditions.
In the current investment environment, only a few assets can truly fulfill both criteria of safety. One notable category is money market funds. These specialized mutual funds are designed to offer a blend of capital preservation and income potential.
“Money market funds invest in very liquid, short-term securities with the objective of preserving your capital, while also providing income at prevailing market rates,” says Nafis Smith, principal and head of taxable money markets at Vanguard.
These funds operate with a fixed net asset value (NAV) of $1 per share, unlike other mutual funds whose NAV can fluctuate. Under normal conditions, the NAV of a money market fund should not fall below $1, a very rare situation known in the industry as “breaking the…
