Yes, money market funds can lose money, though it is rare

A money market fund is not the same as a money market account. A fund is an investment — you own shares in a pool of short-term debt that a professional manager buys and sells. When the value of that debt drops, your shares are worth less. An account is a bank product insured by the FDIC up to $250,000. The fund has no such protection.

Money market funds are considered very safe investments because they hold only short-term loans — mostly government bonds and corporate debt that mature in less than a year. But "very safe" is not the same as "no risk." The fund's value can fall if interest rates rise sharply, if the borrowers it holds debt from run into trouble, or if the market panics and everyone tries to sell at once.

The most famous example happened in 2008. The Reserve Primary Fund, one of the largest money market funds in the country, held debt from Lehman Brothers. When Lehman collapsed, that debt became worthless. The fund's share price fell below $1 per share — a moment called "breaking the buck." Investors who had $100,000 in the fund lost real money.

Key Takeaways

  • Money market funds are investments in short-term debt, not bank accounts, so they are not insured by the FDIC and can lose value.
  • The most common reason a fund loses money is a sharp rise in interest rates, which makes existing bonds worth less on the open market.
  • A fund can also lose money if borrowers default on their debt or if panic selling forces the manager to sell bonds at a loss.
  • Money market funds have never broken the buck since 2008, but the risk has not disappeared — it has only become less likely.

How interest rate changes affect what your shares are worth

When interest rates rise, the bonds a money market fund already owns become less attractive. A bond paying 2 percent is worth less when new bonds are paying 4 percent. If the fund manager needs to sell that 2 percent bond before it matures, they have to sell it at a discount — meaning the fund takes a loss.

This happens even though the borrower will eventually pay back the full amount. The loss is real in the moment, and it shows up in the fund's share price. If you own 10,000 shares worth $1 each and the fund loses money, your shares might be worth $0.99 each. You have lost $100.

The longer the bonds in the fund, the bigger the loss when rates rise. Money market funds stick to very short-term debt — usually 30 to 90 days — so this risk is smaller than it would be in a bond fund. But it is not zero.

What happens when borrowers cannot pay back their debt

Money market funds hold debt from governments, banks, and large corporations. These are generally considered safe borrowers. But safety is not certainty. If a major corporation or bank runs into trouble and cannot pay back what it owes, the fund loses money.

The 2008 crisis showed this risk clearly. Lehman Brothers was a major investment bank. Money market funds held its debt because it seemed safe. When Lehman failed, that debt became worthless overnight. Funds that held Lehman debt had to write it off as a loss.

Since 2008, regulators have required money market funds to hold only the safest short-term debt and to keep cash reserves. This makes default less likely. But companies and banks can still fail, and when they do, funds that hold their debt suffer.

Panic selling and forced losses

Money market funds are supposed to be liquid — you can sell your shares and get your money back quickly. But if many investors try to sell at the same time, the fund manager may have to sell bonds before they mature to raise cash. If the market is stressed, those bonds may only sell at a loss.

This is called a "run" on the fund. During the 2008 crisis, investors panicked and tried to pull money out of money market funds all at once. Managers had to sell bonds at fire-sale prices. The Reserve Primary Fund could not sell fast enough, and its share price fell below $1.

Since 2008, regulators have given fund managers tools to slow down withdrawals during a panic — they can impose a temporary fee or delay redemptions. This is meant to prevent forced selling. But these tools are controversial because they trap your money when you need it most.

The difference between money market funds and money market accounts

If you opened a money market account at a bank, your money is insured by the FDIC up to $250,000. The bank takes the risk, not you. Your balance cannot go down unless you withdraw it.

A money market fund is different. You own shares in an investment. The share price moves with the value of the bonds the fund holds. There is no FDIC insurance. If the fund loses money, your balance shrinks.

Money market accounts usually pay less interest than money market funds because the bank is taking the risk. Funds usually pay more because you are taking the risk. The higher rate is compensation for the possibility of loss.

How often money market funds actually lose money

Losses are rare. Most money market funds have never had a negative return. They are designed to be stable and to preserve your principal. In normal market conditions, they do.

But "rare" is not "never." Between 2007 and 2008, several money market funds lost money. The Reserve Primary Fund was the most famous, but others broke the buck or came close. Investors who were in those funds at the wrong time lost real money.

Since 2008, no major money market fund has broken the buck. Regulators tightened the rules, and fund managers became more cautious. But the risk has not disappeared. It is still possible, though less likely than it was.

What to do if you are concerned about loss

If you want zero risk of loss, a money market account at a bank is safer than a money market fund. Your money is FDIC insured, and your balance cannot fall. The tradeoff is a lower interest rate.

If you choose a money market fund, look at what it holds. Funds that hold only government debt are safer than funds that hold corporate debt. Funds that hold very short-term debt (30 days or less) are safer than funds that hold longer-term debt. Read the fund's prospectus — the legal document that describes what it invests in.

Also check the fund's history. A fund that has been around for decades and has never lost money is probably safer than a new fund. But past performance does not may provide future results. Even stable funds can lose money in a severe crisis.

Frequently Asked Questions

Can a money market fund go to zero?

Theoretically yes, but it would require a catastrophic failure. All the borrowers in the fund would have to default at once, or the fund would have to be forced to sell all its bonds at a massive loss. This has never happened. The worst case in modern history was the Reserve Primary Fund in 2008, which fell to $0.97 per share.

Is a money market fund safer than a savings account?

No. A savings account at a bank is FDIC insured up to $250,000, so your balance cannot fall. A money market fund is an investment with no insurance. The fund usually pays more interest because you are taking more risk. Choose based on how much safety you need.

What does "breaking the buck" mean?

A money market fund's share price is supposed to stay at $1. When the value of the bonds it holds falls so much that the share price drops below $1, the fund has "broken the buck." This happened to the Reserve Primary Fund in 2008 when it fell to $0.97. Investors lost money.

Do I lose money if interest rates go up?

Only if you sell before the bonds mature. If you hold your shares, the fund will eventually collect the full value of its bonds when they mature. But if the fund needs to sell bonds early to meet withdrawals, it may have to sell at a loss, which reduces the share price for all investors.

Are government money market funds safer than corporate ones?

Yes. A fund that holds only U.S. Treasury debt has almost no default risk — the government is extremely unlikely to fail to pay. A fund that holds corporate debt has more risk because companies can fail. Government funds usually pay less interest because they are safer.