Money market funds invest in short-term debt issued by governments, banks, and corporations

A money market fund is a mutual fund that holds only very short-term loans — typically maturing in fewer than 90 days. The fund buys these loans from borrowers who need cash quickly and are willing to pay interest for it. You own a share of the fund, so you own a tiny piece of each loan it holds.

The core idea is safety through speed: because the loans mature so fast, the borrower's financial situation is unlikely to change much before repayment. A company that is stable today will almost certainly be stable in 60 days. That short timeline is what makes money market funds feel safer than bond funds, which hold loans that mature years from now.

Money market funds are not the same as money market accounts (which are bank products). Funds are managed investments; accounts are deposit products. Both aim for safety and liquidity, but they work differently and carry different protections.

Key Takeaways

  • Money market funds hold short-term debt that matures in 90 days or fewer, issued by the U.S. Treasury, banks, corporations, and other borrowers.
  • The fund manager buys and sells these loans constantly, so your fund's exact holdings change daily even though you own the same fund share.
  • Money market funds aim to keep their share price stable at $1.00, though this is not may provide and has failed during financial crises.
  • Returns are typically lower than bond funds because the loans are shorter and safer, so borrowers pay less interest.
  • Money market funds are not FDIC-insured the way bank money market accounts are, so your principal is not protected by federal deposit insurance.

The four main types of short-term debt money market funds hold

Treasury bills are loans to the U.S. government that mature in 4, 13, or 26 weeks. The government auctions these constantly and they are considered the safest debt in the world because the U.S. can print money to repay them. A money market fund holding mostly Treasury bills will have very low yield but almost no credit risk.

Certificates of deposit (CDs) issued by banks are also common holdings. These are the same CDs you can buy directly from a bank, but the fund buys them in bulk. The bank promises to repay the full amount plus interest on a set date. Money market funds typically hold CDs with maturities under 90 days.

Commercial paper is short-term debt issued by corporations and financial institutions. A company might issue commercial paper to cover payroll or inventory costs while waiting for customer payments to arrive. These loans typically mature in 1 to 270 days. Commercial paper pays more interest than Treasury bills because the issuer is a corporation, not the government, so there is more credit risk.

Repurchase agreements (repos) are loans where a bank or dealer sells securities to the fund and promises to buy them back at a slightly higher price on a specific date, usually within days. The difference between the sale price and the buyback price is the interest the fund earns. Repos are used heavily by money market funds because they are very short-term and backed by actual securities.

How the fund manager decides what to buy

The fund manager's job is to keep the fund's share price at exactly $1.00 while earning whatever interest rate the market offers. To do this, the manager buys a mix of the four types of debt above, choosing maturities and issuers to match the fund's stated strategy.

A prime money market fund holds commercial paper and CDs from corporations and banks. These pay higher interest but carry more credit risk. A Treasury money market fund holds only Treasury bills and sometimes repos backed by Treasury securities. These pay less but are backed by the U.S. government. A tax-exempt money market fund holds short-term municipal debt (loans issued by states and cities) and is designed for investors in high tax brackets.

The manager constantly buys new debt as old debt matures. If you own the fund for a year, the actual loans inside it will turn over completely — you will own shares of dozens of different Treasury bills, CDs, and commercial paper, but you will own the same fund share the whole time.

Why the $1.00 share price matters and when it breaks

Money market funds are designed to maintain a stable $1.00 share price. This is not a may provide — it is a goal the manager pursues by carefully matching the fund's holdings to its liabilities. If you put in $10,000, you get 10,000 shares worth $1.00 each. If interest rates rise, the manager buys higher-yielding debt, so your fund still pays you interest without the share price dropping.

But the $1.00 price can break. During the 2008 financial crisis, the Reserve Primary Fund — one of the largest money market funds — held commercial paper issued by Lehman Brothers. When Lehman collapsed, the fund's assets fell below its liabilities and the share price dropped to $0.97. Investors who tried to withdraw their money at $1.00 lost money. The U.S. Treasury had to may provide money market funds to stop a broader panic.

This is why money market funds are not risk-free, even though they feel safe. The risk is small if the fund holds mostly Treasury bills, and larger if it holds mostly commercial paper from corporations.

Money market funds versus money market accounts at banks

A money market account is a bank deposit product. It is FDIC-insured up to $250,000, meaning if the bank fails, the government repays you. A money market fund is a mutual fund. It is not FDIC-insured. If the fund's investments lose value, you lose money.

Money market accounts typically pay less interest than money market funds because banks use deposits to make loans, and they keep some of the spread. Money market funds pay whatever interest rate the short-term debt market offers, minus the fund's fee (usually 0.2 to 0.5 percent per year).

Money market accounts are easier to access — you can usually write checks or use a debit card. Money market funds require you to sell your shares, which takes one to two business days to settle. For true emergency cash, a bank money market account is more practical. For cash you do not need immediately, a money market fund may pay more.

How interest rates affect what money market funds hold

When the Federal Reserve raises interest rates, newly issued Treasury bills and commercial paper pay more. The fund manager buys these higher-yielding securities, so your fund's yield rises. When rates fall, new debt pays less, so your fund's yield falls. Your share price stays at $1.00, but the interest you earn changes with the market.

This is different from a bond fund, where rising rates cause the share price to fall (because existing bonds paying low rates become less valuable). Money market funds avoid this problem by holding only very short-term debt, which reprices constantly.

In a low-rate environment (like 2020 to 2021), money market funds paid almost nothing — sometimes 0.01 percent per year. In a high-rate environment (like 2023 to 2024), they paid 4 to 5 percent. The fund itself does not change; the market rate for short-term debt changes, and the fund's yield follows.

Fees and how they reduce your return

Money market funds charge an annual expense ratio, which is a percentage of your balance deducted each year. This typically ranges from 0.2 to 0.5 percent, though some funds charge less and some charge more. If your fund yields 4 percent and charges 0.3 percent, you keep 3.7 percent.

The expense ratio covers the fund manager's salary, the cost of buying and selling securities, and the fund company's overhead. Lower-cost funds (often index funds that simply hold all Treasury bills of a certain maturity) charge 0.05 to 0.15 percent. Higher-cost funds (often actively managed funds that try to pick the best commercial paper) charge 0.4 to 0.6 percent.

Over time, a 0.3 percent difference in fees compounds. On $100,000 held for 10 years, the difference between a 0.2 percent fund and a 0.5 percent fund is roughly $3,000 in foregone returns. For money market funds, which already pay low returns, fee shopping matters.

Frequently Asked Questions

Can a money market fund lose money?

Yes. While rare, money market funds can lose value if their holdings default or if the fund's share price falls below $1.00. This happened to the Reserve Primary Fund in 2008. However, funds holding mostly Treasury bills are extremely unlikely to lose money because the U.S. government backs the debt.

Is a money market fund the same as a money market account?

No. A money market account is a bank deposit product that is FDIC-insured. A money market fund is a mutual fund that is not insured. Both aim for safety and liquidity, but they work differently and carry different protections.

Why would I choose a money market fund over a savings account?

Money market funds typically pay more interest than savings accounts because they invest in higher-yielding short-term debt. However, they are less liquid (it takes a few days to withdraw) and are not FDIC-insured. For cash you do not need immediately, a money market fund may pay more.

What happens to my money market fund when interest rates fall?

Your share price stays at $1.00, but the interest your fund earns falls. As old debt matures, the manager buys new debt paying lower rates. Your yield declines, but you do not lose principal.

How often do the holdings inside a money market fund change?

Constantly. As short-term debt matures (often within days or weeks), the manager buys new debt to replace it. Over a year, the fund's holdings turn over completely, but you own the same fund share the entire time.