What Is a Money Market Fund?
Written by
Will Healy
Edited by
Elizabeth Constantineau
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If you’re wondering, “What is a money market fund?” it’s a type of mutual fund that invests in short-term, low-risk securities. These funds offer a balance between safety, liquidity and modest returns, making them a popular option for investors looking for a secure place to park their cash.
Unlike money market accounts, which function more like high-yield savings accounts, money market funds are investment vehicles. Investment professionals typically design them to have less risk so that they preserve cash. These funds might not make you wealthy, but they can be a great place to store your savings.
How Do Money Market Funds Work?
To better understand what a money market fund is, think of it as a professionally managed fund that pools money from multiple investors to purchase low-risk, short-term debt securities. These funds are managed by professionals who aim to keep them stable and liquid, ensuring investors can access their money quickly when needed.
Although money market funds typically pay lower interest rates than certain other fixed-income investment vehicles, the tradeoff is their safety and stability. Investors who need to save cash for emergencies — or simply want to store money while waiting for their next equity investments — often choose money market funds.
However, it’s important to note that unlike some other options, like savings accounts, money invested in a money market fund is not protected by FDIC insurance.
Types of Money Market Mutual Funds
What is an example of a money market fund? Varied financial instruments can make up a money market mutual fund. The most common are as follows:
- Government money market funds: Invest at least 99.5% of assets in government securities such as Treasury bills and government-sponsored enterprises such as Fannie Mae and Freddie Mac.
- Prime money market funds: Also known as “general purpose funds,” these invest in short-term bank and corporate debt, such as commercial paper and certificates of deposit.
- Municipal money market funds: Focus on tax-exempt municipal bonds, making them attractive for investors looking to minimize their taxable income.
Advantages of Money Market Funds
The main benefits of money market funds are:
- Safety: They invest in high-quality, short-term securities, minimizing risk.
- Liquidity: Investors can access their funds quickly, making them ideal for emergency savings.
- Low minimum investment: Many money market funds allow investors to start with a small initial deposit.
Risks of Money Market Funds
There are three primary risks involved with investing in money market funds:
- Interest rate risk: When interest rates rise, bond and fixed-income prices fall. This is usually not a large risk with money market funds. This is because they are stocked with very short-term securities, but it is a risk.
- Credit risk: Most money market fund investments are top-quality. But there’s always a risk that an issuer gets downgraded or defaults. This could impair the return of the fund.
- Liquidity risk: One of the key attributes of a money market fund is how accessible, or liquid, the cash is. During a financial crisis, it can be difficult to access the funds in any of your accounts.
Common Fees Associated With Money Market Funds
Investors should be aware of potential fees that may impact returns.
- Management fees: Covers the cost of managing the fund, usually a small percentage of assets.
- Other fees: Some funds charge for account maintenance, withdrawals or transfers.
When To Use a Money Market Fund
Money market funds are ideal for short-term financial goals, such as:
- Emergency savings: A safe place to store funds while keeping them easily accessible.
- Holding cash between investments: Useful for investors who need a temporary place to put their money before making other investments.
- Saving for larger purchases: Provides security while earning a modest return.
How To Invest in a Money Market Fund
Investing in a money market fund is similar to buying a stock. Here are some steps you can follow:
- Open a brokerage account: Choose a platform that offers money market funds.
- Select the right fund: Consider ratios, yield and fund type based on your goals.
- Deposit funds and start investing: Most funds allow you to invest with a low initial deposit.
- Monitor performance: While these accounts are generally low-maintenance, you should still keep an eye on yields and expenses.
Money Market Funds vs. Savings Accounts
A common question among investors is, “What is a money market fund, and how does it compare to a traditional savings account?” The key difference between these two types of investments is that high-yield savings accounts carry $250,000 in FDIC insurance. Money market funds do not have this insurance.
However, money market funds are still low-risk. They may also offer even higher yields than certain high-yield savings accounts.
Conclusion
Money market funds work best for those who need instant access to a large amount of cash. These funds will not make you rich, but they will give you a relatively safe place to store funds and earn a modest return, often above that offered by a savings account.
FAQ
Here are answers to some commonly asked questions about what money market funds are and how they work:- What is the difference between a money market fund and a money market account?
- A money market fund is an investment product that invests in short-term securities. A money market account, on the other hand, is a bank deposit product that is FDIC-insured.
- Are money market funds safe to invest in?
- They are considered low-risk but are not FDIC insured. Investors should choose government-backed funds for the highest stability.
- How do I earn money with a money market fund?
- Money market funds take shareholder money and invest it in liquid securities like short-term bonds, Treasury bills, commercial paper, CDs and other high-quality, short-term investments. The returns they earn on these investments, minus any expenses, are passed along to shareholders.
- Can I lose money in a money market fund?
- Every money market fund will offer the disclaimer that you can lose money and that there is no guarantee that they will maintain their price of $1 per share. However, that occurrence is extremely rare. While all investments carry at least some level of risk, money market funds are among the safest options available.
- What is the typical return on a money market fund?
- Returns vary based on interest rates but are generally higher than traditional savings accounts.
John Csiszar and Elizabeth Constantineau contributed to the reporting for this article.
Our in-house research team and on-site financial experts work together to create content that’s accurate, impartial, and up to date. We fact-check every single statistic, quote and fact using trusted primary resources to make sure the information we provide is correct. You can learn more about GOBankingRates’ processes and standards in our editorial policy.
- Consumer Financial Protection Bureau. "Is a money market account insured?"
- Forbes Advisor. 2022. "Best Money Market Mutual Funds Of 2022."
- U.S. Securities and Exchange Commission. "Money Market Funds."
- FINRA. "Taking a Look at Money Market Funds."
- Vanguard. "What Are Money Market Funds and How Do They Work?"
