Money market mutual funds are funds that hold short-term debt securities, and you buy shares in them through a brokerage account or directly from the fund company

A money market mutual fund pools money from many investors to buy very short-term bonds, Treasury bills, and other low-risk debt that matures in less than a year. You own shares of the fund, not the individual securities. The fund's value stays close to $1 per share, but the yield (the interest you earn) changes based on what the fund manager buys and what interest rates do in the market.

The main difference from a money market account at a bank: a mutual fund is not insured by the FDIC, so your principal is not may provide. But money market mutual funds are extremely stable — they are designed to preserve capital, not grow it. You will earn more in a money market mutual fund than in a savings account when interest rates are higher, but you take on slightly more risk.

Key Takeaways

  • You buy money market mutual fund shares through a brokerage account (like Fidelity, Vanguard, or Charles Schwab) or directly from a fund company, and you can sell them any business day.
  • The fund holds short-term debt securities that mature in less than a year, so the value of your shares stays very close to $1 but the yield changes with interest rates.
  • Money market mutual funds are not FDIC-insured, so there is a small risk of losing principal, though this is rare for funds that follow SEC rules.
  • You will pay an expense ratio (a yearly fee as a percentage of your balance) that ranges from nearly 0% to 0.5% or higher, depending on the fund.
  • The interest you earn is taxed as ordinary income, or tax-free if you choose a municipal money market fund, which holds bonds issued by states and cities.

Where to buy money market mutual funds

You can buy shares through a brokerage account or directly from the fund company. A brokerage account (at Fidelity, Vanguard, Charles Schwab, E*TRADE, or similar firms) gives you access to thousands of funds from many different companies in one place. You set up the account online, link a bank account, and transfer money to buy shares. Most brokerages charge no commission to buy or sell mutual fund shares.

Alternatively, you can buy directly from the fund company — Vanguard, Fidelity, and T. Rowe Price all offer their own money market mutual funds. Buying directly means you deal with one company, but you see only that company's funds. Most people use a brokerage because it is simpler to compare options and hold other investments in the same place.

How to choose a money market mutual fund

Start by looking at the expense ratio, which is the yearly fee the fund charges as a percentage of your balance. A fund charging 0.10% costs $10 per year on a $10,000 balance. Money market mutual fund expense ratios typically range from 0.01% to 0.50% or higher. Lower is better, especially because the yield on all money market funds is similar — they all hold the same kinds of short-term securities, so the main difference in what you earn is the fee you pay.

Next, check the current yield or 7-day yield, which the fund publishes daily. This tells you what annual return you would earn if the fund's current holdings and interest rates stayed the same for a year. Yields change constantly as the fund buys and sells securities and as market interest rates move. Compare the 7-day yield across a few low-cost funds to see which is paying more right now.

Decide whether you want a taxable or tax-free (municipal) fund. A taxable money market fund holds Treasury bills and corporate debt; the interest is taxed as ordinary income. A municipal money market fund holds bonds issued by states and cities; the interest is usually free from federal income tax and sometimes from state tax too. Municipal funds make sense only if you are in a high tax bracket and live in a state with high income tax.

The steps to open an account and buy shares

If you are buying through a brokerage, go to the brokerage website, click "Open an Account," and fill in your name, address, Social Security number, and employment information. The process takes 10 to 15 minutes. You will choose whether the account is a regular taxable account, an IRA, or another type. For most people saving cash, a regular taxable account is the right choice.

Once the account is open, link your bank account and transfer money into the brokerage. This usually takes one to three business days. Then search for the money market mutual fund you want by its ticker symbol (a short code like VMFXX for Vanguard Federal Money Market Fund) or fund name. Click "Buy," enter the dollar amount or number of shares, and confirm the order. The trade settles the next business day, and your shares are yours.

If you are buying directly from a fund company, the process is similar but you go to that company's website instead. You will set up an account with them, link your bank account, and buy shares of their funds only.

What happens to your money while it sits in the fund

The fund manager buys and sells short-term securities constantly to keep the fund's value at $1 per share. The interest those securities earn is paid out to shareholders as dividends. Most money market mutual funds reinvest those dividends automatically, meaning the number of shares you own grows each day. You do not have to do anything — the fund handles it.

You can check your balance and see your current yield any time by logging into your brokerage or fund company account. You can also see how much you have earned in dividends year to date. If interest rates rise, the fund's yield will rise too (because the manager will buy new securities paying higher rates). If rates fall, your yield will fall.

How to sell your shares and withdraw the money

Selling is as simple as buying. Log into your account, find the fund, click "Sell," enter the number of shares or dollar amount, and confirm. The order executes the same business day, and the cash lands in your brokerage account the next business day. From there, you can transfer it back to your bank account, which usually takes one to three more business days.

There is no penalty for selling early or withdrawing all your money at once. Money market mutual funds are meant to be liquid — you can access your cash quickly. The only cost is the expense ratio you pay while you own the shares, and any taxes owed on the interest you earned.

Tax treatment and record-keeping

The interest you earn in a taxable money market mutual fund is taxed as ordinary income in the year you earn it, even if you do not withdraw the money. If the fund reinvests dividends automatically, you still owe tax on those dividends. Your brokerage will send you a Form 1099-DIV each January showing how much you earned in dividends the previous year. Use that number when you file your tax return.

If you own the fund in a traditional IRA or Roth IRA, the tax treatment is different. In a traditional IRA, you do not pay tax on the interest until you withdraw it. In a Roth IRA, you do not pay tax on the interest ever, as long as you follow the withdrawal rules. If you are using a money market mutual fund as a temporary holding place for cash in an IRA, the tax advantage is built in.

Frequently Asked Questions

Can I lose money in a money market mutual fund?

It is extremely rare. The SEC requires money market funds to hold only very short-term, high-quality debt. The fund's share price is designed to stay at $1. However, it is technically possible for the share price to fall below $1 if the securities in the fund default or interest rates move sharply. This has happened only a handful of times in history, usually during financial crises.

How is a money market mutual fund different from a money market account?

A money market account is a bank product insured by the FDIC up to $250,000. A money market mutual fund is not insured but is extremely stable. Money market accounts often have lower yields and may require a minimum balance or limit how many withdrawals you can make per month. Money market mutual funds have no withdrawal limits and no minimum balance at most brokerages.

What is the difference between a money market fund and a short-term bond fund?

A money market fund holds debt that matures in less than a year, so the value stays very close to $1. A short-term bond fund holds bonds that may mature in one to five years, so the share price can move up and down more. If interest rates rise, a short-term bond fund's value will fall. A money market fund's value will stay stable.

Do I have to keep my money in the fund for a certain amount of time?

No. You can sell your shares and withdraw your money any business day with no penalty. There is no lock-up period or early withdrawal fee. The only cost is the expense ratio you pay while you own the shares.

Should I use a money market mutual fund or a high-yield savings account?

Both are safe places to park cash. High-yield savings accounts are FDIC-insured and have no risk of principal loss. Money market mutual funds are not insured but are extremely stable. When interest rates are similar, a high-yield savings account is simpler because you do not have to manage an investment account. If a money market fund is paying noticeably more, the extra yield may be worth the small additional complexity.