[SIPC instead of FDIC insurance - coverage is about the same]
You left out one detail. Technically if you have $100,000 in Money Fund A it means you hold 100,000 shares that are priced at $1 each. SIPC will protect you from losing your 100,000 shares but cannot protect you if the value of each share falls below $1. This is unlikely to happen, but is legally possible. There were some scares about this happening in 2008.
If you want to be rock solid safe you could choose a money market fund that is backed 100% by US treasuries, but you would earn less interest.
The first case of a money market fund breaking the buck occurred in 1994, when Community Bankers U.S. Government Money Market Fund was liquidated at 96 cents because of large losses in derivatives.
In 2008, the Reserve Fund was affected by the bankruptcy of Lehman Brothers and the subsequent financial crisis. The Reserve Fund’s price fell below $1 due to assets held with Lehman Brothers. Investors fled the fund and caused panic for money market mutual funds in general.
Following the 2008 financial crisis, the government responded with new Rule 2a-7 legislation supporting money market funds. Rule 2a-7 instituted numerous provisions, making money market funds much safer than before. Money market funds can no longer have an average dollar-weighted portfolio maturity exceeding 60 days. They also now have limitations on asset investments. Money market funds must restrict their holdings to investments that have more conservative maturities as well as credit ratings.
The fund dissolved in December 2015, having paid investors $0.991 per share.
In the first case, investors lost 4%, and I’m the second, they lost 0.09%, and the response to the second was to change the laws so to make money market funds more conservative so it won’t happen again.
Yes, it’s possible a fund will break the buck, but it’s incredibly unlikely.
you would earn less interest
Not necessarily, at least net of taxes. I pay state income tax, and my total gain net of taxes is about the same as other funds that aren’t state-tax immune.
For example, if I look at Fidelity, I’ll compare two funds:
SPAXX - 30% Fed tax exempt, 5% 7-day average
SPRXX - 5.07% 7-day average
FLDXX - Treasury only, 5.01% 7-day average
My state tax rate (Utah) is 4.85% (it’s more complicated due to income-based credits, but whatever), so I would need to get 5.36% to have the same net return as FLDXX.
The situation looks even better at Vanguard because their funds have lower costs, thus higher net returns: