A money market fund is a mutual fund that invests in liquid, short-term debt securities, cash and cash equivalents. It can be useful for managing cash and earning income linked to short-term interest rates, but it is an investment—not a bank account. Its shares are not FDIC-insured, and investors can lose money.
What is a money market fund?
Money market funds pool investors’ money to buy short-term investments. The U.S. Securities and Exchange Commission (SEC) describes them as mutual funds holding liquid, short-term debt securities, cash and cash equivalents. They generally pay dividends reflecting short-term interest rates, so income can change as rates change. The SEC’s investor guide explains how these funds work.
Investors buy and sell shares through the fund or a broker. Shares are generally redeemable on demand on a business day at the fund’s net asset value (NAV) per share, subject to the fund’s terms and applicable rules. The fund deducts expenses, which affect returns.
What types of money market funds are there?
Government funds
These funds invest in government-focused holdings. The category describes the fund’s investments; it does not mean the government guarantees the fund’s shares. Review the prospectus to see what a particular fund holds.
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Prime funds
Prime funds invest primarily in taxable, short-term corporate and bank debt, such as commercial paper and certificates of deposit. Their holdings differ from government-focused funds.
Tax-exempt or municipal funds
These funds invest in securities intended to provide tax-exempt income. Whether distributions are tax-exempt, and how they are taxed, depends on the fund and your circumstances.
Retail and institutional funds
Eligibility rules distinguish retail funds, generally intended for individual investors, from institutional funds. The distinction also matters for NAV: most retail and government funds seek to maintain a stable $1.00 NAV per share, while institutional prime and institutional tax-exempt funds must use a floating NAV that reflects the market value of their holdings. A stable NAV is an objective under applicable rules, not a promise that the share price cannot fall. The SEC’s money market fund materials describe the categories and NAV framework.
What are the pros of money market funds?
- Cash management: Investors often use these funds to hold cash or as an alternative to bank savings vehicles. Business-day redemptions can make shares accessible, subject to fund terms and rules.
- Income linked to short-term rates: Dividends generally reflect short-term interest rates. This can make a fund’s income responsive to rate changes, but it also means a quoted yield is not fixed.
- Relatively low risk compared with many mutual funds: Their short-term, liquid holdings can make them less volatile than many other mutual funds. That comparison is not principal protection, an insurance guarantee or a substitute for checking the fund’s risks.
What are the cons and risks?
No FDIC insurance or guaranteed principal
Money market fund shares are not bank deposits and are not insured by the Federal Deposit Insurance Corporation (FDIC). An investor can lose some or all of the amount invested. A bank money market deposit account is a deposit product, not a money market fund; the two should not be treated as interchangeable. The SEC outlines this distinction and the risks of fund shares.
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A stable-NAV fund seeks to keep its share price at $1.00, but it can “break the buck” if its NAV deviates sufficiently from that amount. Floating-NAV shares move with the market value of the fund’s holdings. Either structure can involve losses.
Inflation and low-rate periods can reduce returns
If inflation exceeds a fund’s yield, the money’s purchasing power declines. When short-term rates are very low, fund expenses can exceed investment income.
Liquidity is not unconditional
Redemptions are generally available on business days, but that access is subject to rules and fund terms. In exceptional circumstances, SEC rules allow funds to suspend redemptions and liquidate. This is a stress-related possibility, not routine behavior. The SEC’s November 4, 2024 investor bulletin discusses fund mechanics and liquidity risks.
Yield changes over time
A displayed yield is a measurement for a particular fund and date, not a promise of future income. Because money market fund yields generally follow short-term rates, they can rise or fall. Check the fund’s official disclosures for a dated figure rather than relying on an undated rate.
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Before choosing a fund, check its prospectus and latest shareholder report. The SEC recommends understanding how the fund invests and how investors can retrieve their money, and considering the fund in light of an overall financial situation. Its investor materials provide further guidance.
- Category and holdings: Identify whether the fund is government, prime or tax-exempt, then read what it actually owns.
- Eligibility and NAV: Confirm whether you qualify to invest and whether the fund seeks a stable NAV or uses a floating NAV.
- Yield and expenses: Compare current, dated yields after expenses, the expense ratio and any other fees.
- Access and liquidity provisions: Review redemption procedures, timing and any applicable liquidity provisions.
- Minimums and tax treatment: Check the fund’s investment minimums and how distributions may be taxed for you.
These details are fund-specific and can change, so use the current prospectus and most recent shareholder report for the particular fund.
How is a money market fund different from a money market account?
A money market fund is a mutual fund that invests in securities and cash equivalents; its shares are investments, not FDIC-insured deposits. A money market account—often called a money market deposit account—is offered by a bank as a deposit product. The similar names do not mean they have the same protections or risks. Check whether a product is a fund or a bank account before placing cash in it.
Why are money market funds used for cash?
Their design reflects the need to make fund shares redeemable. In a July 12, 2023 statement, SEC Chair Gary Gensler described money market funds as “nearly $6 trillion in size today”—a historical figure from the time of that statement, not a current estimate. The statement also quoted the SEC’s 1942 report: “Open-end investment companies, because their security holders’ right to compel redemption of their shares by the company at any time, are compelled to invest their funds predominantly in readily marketable securities.” Gensler’s statement provides the quotation and context.
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