Loading the player...

What is a 'Money Market Fund'

A money market fund is an investment whose objective is to earn interest for shareholders while maintaining a net asset value (NAV) of $1 per share. A money market fund’s portfolio is comprised of short-term, or less than one year, securities representing high-quality, liquid debt and monetary instruments. Investors can purchase shares of money market funds through mutual funds, brokerage firms and banks.

BREAKING DOWN 'Money Market Fund'

A money market fund's purpose is to provide investors with a safe place to invest easily accessible, cash-equivalent assets. It is a type of mutual fund characterized as a low-risk, low-return investment. Since money market funds have relatively low returns, investors such as those participating in employer-sponsored retirement plans, might not want to use money market funds as a long-term investment option because they will not see the capital appreciation they require to meet their financial goals.

Pros and Cons of Money Market Funds

Aside from being low risk and highly liquid, money market funds may be attractive to investors because they have no loads, which are fees mutual funds may charge for entering or exiting the fund. Some money market funds also provide investors with tax-advantaged gains by investing in municipal securities that are tax-exempt at the federal and/or state level. A money market fund might also hold short-term U.S. Treasury securities, such as T-bills; certificates of deposit (CDs); and corporate commercial paper.

A downside of money market funds is they are not covered by federal deposit insurance. Other investments with comparable returns, such as money market deposit accounts, online savings accounts and certificates of deposit, are covered. However, money market funds are considered safe investments and are regulated under the Investment Company Act of 1940.

New Rules for Money Market Fund Managers

Until 2014, money market funds were allowed to fix their net asset value (NAV) so it would always trade at $1 per share. In their history, only three money market funds have been forced to break the $1 NAV. As of 2016, the most recent occurrence was during the financial crisis of 2008, which caused a run on money market fund assets. To avoid a future occurrence, the U.S. Securities and Exchange Commission (SEC), issued new rules for the management of money market funds for the purpose of providing them with more stability and resilience. The new rules place tighter restrictions on portfolio holdings and introduce triggers for imposing liquidity fees and suspending redemptions. The rules also require fund managers to utilize a floating NAV instead of a fixed $1 NAV. For some investors, this introduces the risk of principal where it never existed before. The floating NAV rule is not likely to affect individual investors who invest in funds designated as retail money market funds.

RELATED TERMS
  1. Mutual Fund

    An investment vehicle that is made up of a pool of funds collected ...
  2. Investment Fund

    A supply of capital belonging to numerous investors that is used ...
  3. Breaking The Buck

    When the net asset value (NAV) of a money market fund falls below ...
  4. United States Treasury Money Mutual ...

    An investment fund that pools money from investors to purchase ...
  5. Forward Pricing

    A Securities and Exchange Commission regulation that requires ...
  6. Asset Size

    The total market value of the securities in a mutual fund's portfolio. ...
Related Articles
  1. Investing

    Why Money Market Funds Break The Buck

    These funds are noted for their safety in a rough market. Read on to find out why.
  2. Investing

    Introduction To Money Market Mutual Funds

    Learn about the easiest way to benefit from money market securities.
  3. Financial Advisor

    What to Tell Clients About New Money Market Rules

    New money market rules will have little impact on clients. Here's what to tell them if they ask.
  4. Investing

    A Safer Money Market With Rule 2a-7

    Money markets are traditionally "safe" investments - but Rule 2a-7 just made them a bit safer.
  5. Investing

    New Money Market Regulations: What You Need to Know

    New money market regulations set to go into effect in October will change the face of an important investment option for retirement accounts forever.
  6. Investing

    Breaking The Buck: Why Low Risk Is Not Risk-Free

    Money market funds have been assumed to be safe investments, and they are - but only to a point.
  7. Financial Advisor

    Advising FAs: Explaining Mutual Funds to a Client

    More than 80 million people, or half of the households in America, invest in mutual funds. No matter what type of investor you are, there is bound to be a mutual fund that fits your style.
RELATED FAQS
  1. How do I calculate the loan-to-value ratio using Excel?

    Learn what a mutual fund and a money market fund are, and understand the differences between each and how they serve various ... Read Answer >>
  2. What typically comprises a money market fund?

    Learn about the basic types of money market funds and discover how they are characterized by the types of investments that ... Read Answer >>
  3. What determines the interest rate in my money market account?

    Placing funds in a money market account may provide a higher interest rate than a savings account due to the underlying securities ... Read Answer >>
  4. What are some examples of money market funds?

    Learn more about different types of money market mutual funds, including those that invest in government paper versus commercial ... Read Answer >>
  5. What are the risks involved in keeping my money in a money market account?

    Setting aside funds in a money market account can be a safe investment strategy, but investors should be aware of the risks ... Read Answer >>
Hot Definitions
  1. Aggregate Demand

    The total amount of goods and services demanded in the economy at a given overall price level and in a given time period.
  2. Fixed Cost

    A cost that does not change with an increase or decrease in the amount of goods or services produced. Fixed costs are expenses ...
  3. Blue Chip

    A blue chip is a nationally recognized, well-established, and financially sound company.
  4. Payback Period

    The length of time required to recover the cost of an investment. The payback period of a given investment or project is ...
  5. Collateral Value

    The estimated fair market value of an asset that is being used as loan collateral. Collateral value is determined by appraisal ...
  6. Fiduciary

    A fiduciary is a person who acts on behalf of another person, or persons to manage assets.
Trading Center