Money market funds are not bank accounts, so they do not carry FDIC insurance

A money market fund is a type of mutual fund that invests in short-term debt—things like Treasury bills, commercial paper, and certificates of deposit. Because it is a mutual fund, not a deposit account, your money is not protected by the Federal Deposit Insurance Corporation (FDIC). That is the first and most important difference between a money market fund and a money market account at a bank.

When you buy shares in a money market fund, you own a piece of the fund's investments. The value of those shares can go down if the underlying investments lose value. In practice, money market funds are designed to keep share prices stable at $1 per share, but that stability is not may provide by any government agency. If the fund's investments deteriorate badly enough, the share price can fall below $1—an event called "breaking the buck." This has happened only a handful of times in the history of money market funds, most notably during the 2008 financial crisis, but it is possible.

Key Takeaways

  • Money market funds are mutual funds, not bank deposits, so they are not covered by FDIC insurance.
  • The Securities and Exchange Commission (SEC) sets rules about what money market funds can invest in, which limits risk but does not eliminate it.
  • Money market funds held at a brokerage are protected against the brokerage's failure through SIPC coverage, but this covers only the loss of your securities, not investment losses.
  • The main risk to your money is that the fund's investments decline in value, which would lower the value of your shares.
  • Money market funds are generally considered safer than stock mutual funds but riskier than bank savings accounts.

What the SEC requires money market funds to do

The Securities and Exchange Commission regulates money market funds and sets strict rules about what they can hold. These rules were tightened after the 2008 crisis. A money market fund must invest only in very short-term, high-quality debt—typically securities that mature in 13 months or less. The fund must hold a certain percentage of its assets in securities that can be sold quickly for cash.

These rules reduce risk, but they do not eliminate it. A money market fund can still lose money if the companies or governments it lends to default on their debt. During periods of financial stress, even short-term debt can become harder to sell, which can force a fund to hold securities longer than planned or sell them at a loss. The SEC rules make this less likely, but they cannot prevent it entirely.

SIPC protection if you hold the fund at a brokerage

If you own a money market fund through a brokerage account—such as at Fidelity, Charles Schwab, or Vanguard—your account is protected by the Securities Investor Protection Corporation (SIPC) up to $500,000 per account. This protection covers the loss of your securities if the brokerage itself fails and cannot return your investments to you.

SIPC protection does not cover investment losses. If your money market fund loses value because its underlying investments declined, SIPC does not reimburse you. SIPC only protects you if the brokerage goes out of business and your account records are lost or your assets are stolen. In that case, SIPC would help restore your account to what it was worth on the day the brokerage failed.

How money market funds performed during the 2008 financial crisis

The 2008 crisis is the clearest example of what can go wrong with money market funds. In September 2008, a large money market fund called the Reserve Primary Fund held debt issued by Lehman Brothers, a major investment bank. When Lehman collapsed, the fund's assets lost value rapidly. The fund announced that its share price had fallen to $0.97—it had broken the buck.

This triggered panic among investors in other money market funds, who rushed to withdraw their money. The Federal Reserve and the U.S. Treasury stepped in with emergency support, including a temporary may provide program for money market funds. No other major money market fund broke the buck, but the crisis showed that the risk was real. Since then, the SEC has strengthened the rules governing what money market funds can hold and how they must manage their portfolios.

Comparing money market funds to money market accounts

A money market account is a bank deposit product that is FDIC-insured up to $250,000. A money market fund is a mutual fund that is not FDIC-insured. This is the single most important difference in safety. If you want the highest level of protection, a money market account at an FDIC-insured bank is safer than a money market fund.

However, money market funds often pay higher interest rates than money market accounts because they carry more risk and are not insured. The trade-off is yours to make based on how much safety you need and what interest rate you can accept. If you have more than $250,000 to deposit, a money market fund may be necessary because FDIC insurance covers only up to that amount per account at a single bank.

What happens if a money market fund fails

If a money market fund's investments decline sharply and the fund cannot recover, the fund company will typically liquidate the fund—sell all its holdings and return the proceeds to shareholders. You would receive whatever the fund's assets are worth at that time, which could be less than you invested. This is different from a bank failure, where FDIC insurance would cover your deposits up to $250,000.

The fund company itself does not go out of business when a money market fund fails; only that particular fund closes. Other funds managed by the same company continue to operate. The fund company may also try to stabilize the fund by injecting its own capital, though it is not required to do so. In practice, large fund companies often do this to protect their reputation.

How to assess the safety of a specific money market fund

If you are considering a money market fund, you can look at several things to understand its risk level. Check the fund's prospectus—the official document that describes what the fund invests in. Look at the average maturity of the fund's holdings; shorter maturity means lower risk. Look at the credit quality of the issuers; funds that hold mostly Treasury securities or debt from highly-rated companies are safer than funds that hold debt from lower-rated issuers.

You can also look at the fund's history during periods of market stress. Did it maintain a stable share price during the pandemic in 2020, or during the banking stress in 2023? Funds that held up well during past crises are generally managed more conservatively. The fund's expense ratio—the annual fee charged by the fund—also matters; lower fees mean more of your money stays invested.

Frequently Asked Questions

Can a money market fund go to zero?

Theoretically yes, but it is extremely unlikely. A money market fund would have to experience massive losses across nearly all of its holdings. In practice, the SEC's rules about what money market funds can hold make this scenario very remote. The fund would break the buck and likely be liquidated before reaching zero.

Is my money market fund safe if the stock market crashes?

Money market funds do not hold stocks, so a stock market crash does not directly affect them. However, a severe market crash can trigger a broader financial crisis that affects the short-term debt markets where money market funds invest. During the 2008 crisis, money market funds were affected even though they held no stocks.

What is the difference between a money market fund and a money market account?

A money market account is a bank deposit covered by FDIC insurance up to $250,000. A money market fund is a mutual fund not covered by FDIC insurance. Money market accounts are safer but typically pay lower interest rates. Money market funds carry more risk but often pay higher rates.

Do I need to worry about my money market fund if the bank fails?

If you hold the fund at a brokerage, the brokerage's failure does not directly affect the fund itself. Your shares are held in your name and are protected by SIPC. However, if you hold the fund at a bank that fails, the bank's failure does not affect the fund either—the fund is a separate investment managed by the fund company.

Should I move my money from a money market fund to a money market account?

That depends on your priorities. If safety is your main concern and you have less than $250,000, a money market account at an FDIC-insured bank is safer. If you want the highest interest rate available and can accept the small risk that comes with a mutual fund, a money market fund may be better. You can also split your money between both.