Glossary
Money market fund
A mutual fund that invests in short-term, high-quality debt and aims to keep a stable value, used as a cash alternative.
On this page
A money market fund is a mutual fund that holds very short-term, high-quality debt, such as Treasury bills, repurchase agreements and commercial paper, and pays out the interest it earns. Most aim to keep a steady share price of $1.00, which makes them a common place to park cash in a brokerage account. They are among the lowest-risk investments available, but they are not bank deposits and are not FDIC insured.
How they work
In the US, money market funds operate under SEC Rule 2a-7, which limits the maturity, credit quality and concentration of what they hold and sets minimum levels of daily and weekly liquid assets. The main types are:
- Government funds, holding almost entirely Treasury and agency securities and repos backed by them.
- Prime funds, which also hold corporate short-term debt and pay slightly more.
- Tax-exempt funds, holding short-term municipal debt.
Government and retail funds generally keep a stable $1.00 price; institutional prime and tax-exempt funds use a floating price.
What to watch for
A money market fund can, in rare cases, "break the buck." In September 2008 the Reserve Primary Fund fell below $1.00 after losses on Lehman Brothers debt, setting off a wave of redemptions. Later SEC reforms raised liquidity requirements and added fees on large redemptions at some fund types. At a failed brokerage, SIPC protects money market fund shares as securities, but no program protects against a loss in the fund's value. Compare expense ratios, since they come straight out of the yield.