A money market fund is a type of open-end mutual fund. Typically, investors use money market funds to park money, as they are short-term, liquid investments. Unlike longer-term investments, such as stocks and bonds, money market mutual funds are valued primarily for their safety rather than for paying an especially high yield.
Institutional money market funds are a specialized class of money markets that are designed, as the name implies, for institutions rather than individuals. Recent changes enacted by the U.S. Securities and Exchange Commission have altered the fundamental structure and pricing of institutional money market funds. You should pay close attention to the differences before you invest, especially if you are a first-time investor.
Differences Between Retail and Institutional Money Market Funds
An important distinction between institutional and retail money market funds lies in the pricing of the funds. Retail money market funds are allowed to keep a net asset value of $1 per share. Institutional funds, on the other hand, have a floating NAV. This means that the price can change from day to day, based on the actual conditions of the market.
Another difference between the two types of funds is in their target market. Retail money market funds are designed to be purchased by individual investors. Institutional funds, on the other hand, allow purchases by entities that are not “natural persons,” such as companies or pension funds.
The main reason for this distinction is to shield individual investors from a fluctuating NAV. In times of market stress, a plummeting NAV could spell disaster for an investor whose “safe” money is in a money market that goes down in value. That being said, natural persons are allowed to purchase institutional money market funds.
A final important change implemented by the SEC is that non-government money market funds now have the ability to implement liquidity fees and redemption gates. Essentially, this means that at certain times, investors might have to pay to get their money out of a money market fund — or their access to their funds might be limited altogether. This is intended to help prevent runs on the money funds during times of financial stress in the markets.
Learn More: What Is a Money Market Account?
Institutional Money Market Fund Holdings
Money market funds are restricted by federal law as to what they can hold. All money market fund investments must be short-term and have minimal credit risk. Typical investments include U.S. Treasury bills, federal agency notes, certificates of deposit and commercial paper, which are short-term debt obligations issued by individual corporations.
How to Get an Institutional Money Market Fund
Although individual investors are allowed to buy institutional money market funds, the minimum initial investment required by the funds is usually too high for the average investor. For example, the State Street Institutional Liquid Reserves Fund requires a minimum of $25,000,000. The Fidelity Investments Money Market Prime Reserves Portfolio – Class I carries a $1,000,000 minimum investment. Most major financial services firms offer a range of money market funds, including institutional ones.
Institutional Money Market Fund Rates
Institutional rates are often higher than normal money market rates. For example, the Fidelity Prime Portfolio referenced above carries a seven-day yield of 0.98 percent, as of May 31, 2017, while the regular, retail-oriented Fidelity Money Market Fund’s seven-day yield is just 0.80 percent. You’ll have to shop around for the best money market funds. According to the Federal Reserve Bank, as of June 19, 2017, the national average rate on money market jumbo deposits — those greater than or equal to $100,000 — was just 0.12 percent.
Benefits and Caveats of Institutional Money Market Funds
The main benefit of an institutional money market fund is the higher yield. Institutional funds also carry the benefits of all money market funds, including liquidity and low credit risk.
The main caveat to investing in an institutional fund is the floating NAV. Because investors typically use money market funds for stability, a fluctuating NAV is antithetical to this goal. The high minimum investment level can also be a deterrent. And unlike CDs and other bank deposits, money market funds are not insured by the FDIC.