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.