For educational purposes only; not investment advice. Investing may result in loss.
Direct answer
A money market fund is a mutual fund that holds liquid, short-term debt securities, cash, and cash equivalents. Eligible holdings can include Treasury bills, repurchase agreements, commercial paper, bank obligations, and short-term municipal debt, depending on the fund. Investors often use these funds to hold cash while earning dividends that generally follow short-term rates.
It is not a money market deposit account. Fund shares are securities, not bank deposits, and are not FDIC- or NCUA-insured. Government and retail money market funds generally seek a stable $1.00 net asset value (NAV); institutional prime and institutional tax-exempt funds must use a floating NAV. A stable price is an objective, not a guarantee.
Compare the exact share class and prospectus: government, Treasury-focused, prime, or tax-exempt; retail or institutional; current 7-day yield; gross and net expense ratios and fee waivers; holdings and issuer concentration; weighted average maturity and life; minimums; purchase, redemption, and brokerage cutoffs; liquidity fees; and tax treatment.
Mechanism
Money market funds accrue income from short-dated holdings and usually distribute net investment income as dividends, often monthly. As holdings mature and are replaced, portfolio yield tends to follow short-term market rates with a lag. Rate cuts, fee changes, defaults, valuation changes, or a different portfolio mix can reduce the yield.
Government funds invest overwhelmingly in cash, government securities, and fully collateralized government repurchase agreements. A Treasury-focused fund may use a narrower mandate, but its exact permitted holdings come from its prospectus. Prime funds can hold private short-term obligations such as commercial paper and bank instruments; tax-exempt funds primarily hold short-term municipal obligations. A higher yield can reflect different credit, liquidity, tax, expense, or access characteristics rather than a free return advantage.
The current 7-day yield annualizes net investment income over the preceding seven days under a standardized method. It already reflects applicable fund operating expenses and any current fee waivers for that share class, so subtracting the stated expense ratio again would usually double count expenses. It is not a guaranteed rate, a seven-day holding-period return, or the same as an APY; waivers can expire and yields can change daily.
Example or formula
Suppose a fund shows:
| Item | Value |
|---|---|
| 7-day yield | 4.80% |
| Net expense ratio | 0.20% |
| Redemption availability | Next business day in this example |
| Main holdings | Treasury bills and government repos |
If an investor holds $20,000 for 30 days, the balance does not change, and the fund’s net 7-day yield stays near 4.80%, a simple estimate is:
$20,000 × 4.80% × 30 / 365 ≈ $78.90
The estimate uses the already-net displayed yield; it does not subtract the 0.20% expense ratio again. Actual dividends depend on each day’s balance and income accrual, changing yields, fee waivers, rounding, distribution and reinvestment choices, and taxes. Compounding or a different day-count convention can also change the result.
Risks
Money market funds have lower risk than many other funds, but an investor can lose money. Credit losses, interest-rate and spread changes, heavy redemptions, or market stress can reduce a floating NAV or cause a stable-NAV fund to “break the buck.” A sponsor is not required to rescue a fund.
Yield and purchasing-power risks are common. A high current 7-day yield can fall as holdings mature or fees and waivers change, and inflation can exceed the after-tax return. Tax-exempt income is not automatically exempt from every federal, state, local, or alternative-minimum-tax consequence; Treasury-related state-tax treatment also depends on holdings and local rules.
Liquidity rules vary by fund type. Institutional prime and institutional tax-exempt funds generally must charge a liquidity fee on redemption days when daily net redemptions exceed 5% of net assets unless estimated liquidity costs are de minimis. A non-government fund can also impose a discretionary liquidity fee when its board determines that doing so is in the fund’s best interests. Current rules do not permit a fund to gate redemptions merely because a regulatory liquidity threshold is crossed, but liquidation and other extraordinary provisions still matter.
Product and operational confusion add risk. A brokerage cash sweep, bank money market deposit account, direct Treasury bill, short-term bond ETF, and money market fund can differ in insurance, custody protection, pricing, trading hours, settlement, automatic liquidation, and taxes. Shares are generally redeemable on a business day, but order cutoffs, holidays, the fund and broker’s processing rules, and whether a broker auto-liquidates the fund determine when cash is actually available for a trade, transfer, or payment.
Common misconceptions
- “Money market funds are insured bank accounts.” They are mutual funds, not deposits; FDIC and NCUA insurance do not cover fund shares.
- “The 7-day yield is locked in for seven days.” It annualizes a recent seven-day period and can change daily.
- “I should subtract the expense ratio from the displayed 7-day yield.” The standardized current yield is already net of applicable fund expenses; compare the correct share class and check whether a waiver is temporary.
- “Every money market fund stays at $1.00.” Institutional prime and institutional tax-exempt funds float, while a stable-NAV fund can break the buck.
- “Government, Treasury, prime, and tax-exempt funds are interchangeable.” Their mandates, risks, liquidity-fee rules, and tax effects differ.
- “Redeemable on demand means spendable at every moment.” Business-day cutoffs and fund and brokerage processing still govern access.
Related topics
Authoritative sources
- Investor.gov, “Money Market Funds.”
- FINRA, “Taking a Look at Money Market Funds.”
- SEC, “Money Market Fund Reforms,” Release No. 33-11211.
- SEC Form N-1A, standardized money market fund yield calculation.