One person's flight to safety is another person's panic. But no matter what you call it, many investors are making an unnecessary trip in that direction with their money-market mutual funds.
Market concerns are behind the flight to quality that has pushed assets in money-market funds to a record $2.72 trillion.
But if you have been thinking that you might join in that journey and change your money-market fund to gain additional safety, think again; the journey isn't only unnecessary, but you're already too late.
That hasn't stopped investors from making changes, and is undoubtedly why tax-free funds added nearly $4.4 billion last week, while assets in taxable funds were shrinking by more than $1.2 billion, according to Money Fund Report, a service of iMoneyNet, a research firm that tracks money-market activity.
To see why you don't need to change money funds, you must know how money funds work.
Money-market funds are ultra-safe investments, buying interest-bearing securities that mature within a year. The spectrum of investments runs from certificates of deposit to Treasury securities, from insured notes to asset-backed commercial paper such as "funding agreements."
It's this last category of asset that has the public worried, because one way to define "funding agreement" is a "group of second-mortgage loans."
With the stock market rocked by the subprime lending crisis -- where lenders made loans to borrowers of questionable credit quality and are now fearing defaults -- investors are afraid that their money funds might be next to feel the pain.
Unlike ordinary mutual funds, money-market funds maintain a constant price of $1. Each day, a fund's holdings are "marked to market," meaning the current market value of its holdings is checked.
If a fund has a big holding in an issue that goes kaflooey, the share price might "break the buck" and fall below $1. This dire money-losing scenario has happened just once, 13 years ago, to a no-name institutional fund that would wind up being valued at 96 cents per share.
Still, investors want money fund investing to be worry-free, which is why they are moving to the safest parts of the money-market world.
"The whole issue is terribly overblown when it comes to money funds, but there is so much bad news out there that people are finding it hard to ignore," says Connie Bugbee, managing editor at iMoneyNet.
"I can understand it because if I were reading the headlines and didn't know better," she said, "I might be moving to a CD or money-market [bank] account just to be safe."
To "know better," one must understand how money managers do their jobs. Typically, they hold ultra-short-term securities to maturity.
If an asset class gets into trouble, they don't bail out and sell at a loss, but ride out the weeks until the paper matures, typically without realizing any loss.
At the same time, any new money coming in -- or any proceeds from matured investments being reinvested -- is put into a different type of paper.
"The current crisis is really concentrated in the asset-backed commercial paper area," says Peter Crane of Crane Data, publisher of the Money Fund Intelligence newsletter.
"But by the time you figure out if that is something your fund was holding, that paper is gone; the funds change their allocations every day. They don't sell anything, they just stop buying anything that's bad news, so that pretty soon the fund has moved away from whatever paper it had that might have been considered dangerous."
More important, however, is that if circumstances could put a money fund into break-the-buck territory, the fund's sponsor would bail it out.
No fund firm wants the embarrassment -- or resulting rush for the exits in its other funds -- from having a money fund fail. Since 1994, there are countless cases of fund firms buying back troubled paper to ensure that retail shareholders avoid a loss.
"No way a fund company that wants to still do business tomorrow lets one of their money funds break the buck today," says Crane. "But if you're worried, stick with the big-name funds."
And if name-brand funds don't give you sufficient solace, consider choosing your money funds from the "B list."
Normally, money funds are the one place in which past performance is a real guide to what's next.
In the current environment, however, an investor might worry about what the top-paying funds are doing to stretch for their extra yield.
If you have that fear, buy a fund with a solid record and a good yield, but that doesn't push to top the charts.
Says Bugbee: "When it comes to money funds, investors really should not be worried right now. If they are, they can gravitate towards insured funds or Treasury-only funds.
"But if they just want to stick with the money-market fund they've always had, they shouldn't worry that they'll get into trouble by doing nothing here."
Chuck Jaffe is senior columnist for MarketWatch. His postal address is Box 70, Cohasset, MA 02025-0070.