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. If invested in a credit union, however, money market accounts are insured through the National Credit Union Agency. 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.

Further Features of Money Market Accounts 

Money market accounts appeal to investors and savers because they can shop around to find banks that pay higher interest rates, and banks will often offer higher rates for larger balances. Those using a money market fund can typically withdraw their money at any time but may have a limit on the number of times they can withdraw. Money market accounts also differ from typical savings and checking accounts in that they often have higher balance requirements. 

RELATED TERMS
  1. Breaking the Buck

    Breaking the buck occurs when the net asset value (NAV) of a ...
  2. United States Treasury Money Mutual ...

    A United States Treasury money mutual fund is a mutual fund that ...
  3. Investment Fund

    A supply of capital belonging to numerous investors that is used ...
  4. Investment Company

    An investment company is a corporation or trust engaged in the ...
  5. Closed Fund

    A closed fund is a fund that is closed - either temporarily or ...
  6. Call Money

    Call money is money loaned by a bank that must be repaid on demand. ...
Related Articles
  1. Retirement

    Introduction To Retirement Money Market Accounts

    Money market funds are used in retirement plans and accounts because they are liquid, stable and pay competitive rates of interest.
  2. Investing

    4 Factors to Know About Money Market Reform in 2016 (FII, BAC)

    Learn more about the impending implementation of the money market fund reform, including how it impacts individual and institutional investors.
  3. Investing

    Do Money-Market Funds Pay?

    This investment provides security, but its returns may not be adequate for long-term investors.
  4. Investing

    2016's Most Promising Money Market Funds

    Learn information on some of the most promising money market mutual funds for investors to consider adding to their portfolio in 2016.
  5. Financial Advisor

    Money Market Mayhem: The Reserve Fund Meltdown

    This event serves as a stark reminder to investors about understanding their portfolios.
  6. Investing

    How Money Market Funds Got Safer With Rule 2a-7

    Money market funds are traditionally 'safe' investments—but Rule 2a-7 made them a bit safer.
  7. Retirement

    SEC Rules Mean Big Changes for Money Market Funds

    "Prime” money market funds that buy both corporate and government debt will be able to charge redemption fees in a volatile market.
  8. Investing

    Debt Mutual Funds Vs. Fixed Deposits

    Learn about the advantages and disadvantages of debt-oriented mutual funds and fixed deposit accounts, including how each investment generates income.
RELATED FAQS
  1. 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 >>
  2. 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 >>
  3. 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 >>
  4. Why would you keep funds in a money market account and not a savings account?

    Read about the differences between money market accounts and savings accounts, and see why a depositor would elect a money ... Read Answer >>
Hot Definitions
  1. Consumer Price Index - CPI

    A measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, ...
  2. Moving Average - MA

    A moving average (MA) is a widely used indicator in technical analysis that helps smooth out price action by filtering out ...
  3. Stop Order

    A stop order is an order to buy or sell a security when its price increases past a particular point in order to limit losses ...
  4. Inflation

    The rate at which the general level of prices for goods and services is rising and, consequently, the purchasing power of ...
  5. Candlestick

    A chart that displays the high, low, opening and closing prices for a security for a single day. The wide part of the candlestick ...
  6. Indicator

    Indicators are statistics used to measure current conditions as well as to forecast financial or economic trends.
Trading Center