A money market fund is a type of mutual fund that holds short-term debt securities—mostly government bonds, corporate IOUs due within a year, and cash equivalents—and pays you interest on your balance.
Unlike a money market account at a bank, a money market fund is not insured by the FDIC. It is run by an investment company (Vanguard, Fidelity, Schwab, and others) and you own shares in the fund itself, not a deposit account. The fund's value can fluctuate slightly, though it is designed to stay close to $1 per share. The interest rate changes daily based on what the fund earns from its holdings.
Money market funds sit between a regular savings account (which pays almost nothing but is FDIC-insured) and a bond fund (which holds longer-term debt and can swing in value more). They are meant for money you need to keep liquid—accessible within a few days—but want earning more than a checking account offers.
Key Takeaways
- A money market fund invests in short-term debt that matures within a year, so the fund's value stays relatively stable compared to stock or bond funds.
- Your money is not FDIC-insured, but the fund holds very low-risk securities, so the risk of losing principal is small but real.
- Interest rates on money market funds move with the Federal Reserve's rate changes, so your earnings rise and fall with the broader economy.
- You can usually move money out within one to three business days, making it faster than a CD but slower than a savings account.
- Money market funds charge an expense ratio—typically 0.1% to 0.5% per year—which reduces your earnings compared to what the fund itself makes.
How a money market fund earns and pays you interest
The fund manager buys short-term debt: U.S. Treasury bills (IOUs from the federal government due in weeks or months), commercial paper (short-term corporate debt), and sometimes certificates of deposit from banks. As these securities mature and pay interest, the fund collects that income and distributes it to shareholders—you—usually monthly or quarterly.
The interest rate you see quoted is the fund's yield, which reflects what it earned over the past 30 days. That yield changes constantly. When the Federal Reserve raises its benchmark interest rate, new securities the fund buys pay more, so the yield climbs. When the Fed cuts rates, new purchases pay less, and your yield falls. You do not lock in a rate the way you do with a CD.
The fund also charges an expense ratio—a percentage of your balance taken annually to cover management costs. A fund charging 0.2% per year means if you hold $10,000, you pay $20 per year. This comes out of your earnings before interest is credited to you.
The difference between a money market fund and a money market account
A money market account is a bank deposit product. It is FDIC-insured up to $250,000, so your principal is protected even if the bank fails. It usually has a lower interest rate than a money market fund, and many require a minimum balance or charge fees if you fall below it. You access it like a checking or savings account—debit card, transfers, sometimes checks.
A money market fund is an investment product. It is not FDIC-insured. Your principal can fluctuate slightly (though the fund is designed to hold $1 per share). You own shares in the fund, not a deposit. You move money by selling shares, which typically takes one to three business days to settle. The interest rate is usually higher than a money market account because you are taking on the small risk that the fund's value could dip.
If you need may provide safety and do not mind a lower rate, a money market account makes sense. If you want higher earnings and can tolerate minimal risk, a money market fund may be the better choice.
Who should consider a money market fund
Money market funds work well for an emergency fund you want to keep earning something while staying accessible. They are also useful for money you are saving for a near-term goal—a car down payment in six months, a home repair fund, or cash you are holding while deciding where to invest it next.
They are less useful if you need the money within days (a savings account is faster) or if you cannot tolerate any risk to principal (an FDIC-insured account is safer). They are also not a long-term investment—the returns are modest and do not keep pace with inflation over years.
Retirees sometimes use money market funds to hold the portion of their portfolio they plan to spend in the next year or two, keeping it safe but earning more than cash. Young savers building an emergency fund may prefer them to savings accounts if they have enough to meet the fund's minimum investment (often $1,000 to $3,000, though some funds have no minimum).
How to buy a money market fund
You buy money market funds through a brokerage account—Fidelity, Vanguard, Charles Schwab, or your bank's investment platform. You open an account, fund it by linking a bank account or transferring money, then search for the money market fund you want and place an order to buy shares.
Most brokerages offer their own money market funds (often with low or no expense ratios for their customers) and also let you buy funds from other companies. Compare the expense ratio, the current yield, and the minimum investment. A fund charging 0.1% per year is significantly cheaper than one charging 0.5%, especially if you hold a large balance.
Once you own shares, interest accrues daily and is usually credited monthly or quarterly. You can sell your shares anytime and the cash typically arrives in your brokerage account within one to three business days. Some brokerages let you write checks against a money market fund or use it as a sweep account—money automatically moves there when you sell other investments.
Risks and limits of money market funds
The main risk is that the fund's value could fall below $1 per share. This is rare—it has happened only a handful of times in decades—but it is possible if the securities the fund holds default or lose value sharply. During the 2008 financial crisis, one major money market fund "broke the buck" (fell below $1), shocking investors who thought the funds were nearly risk-free.
A second limit is that money market funds do not keep pace with inflation over time. If inflation runs 3% per year and your fund yields 4%, you are only gaining 1% in real purchasing power. For money you need to keep safe and accessible, that is fine. For long-term savings, stocks or bonds are better.
A third consideration is that some money market funds have restrictions on how often you can withdraw or how much you can move at once. Read the fund's prospectus to understand any limits. Most have none, but some impose a small fee or require a waiting period if you exceed a certain number of withdrawals per month.
Money market funds versus other short-term options
| Option | FDIC-Insured | Current Rate Range | Access Speed | Best For |
|---|---|---|---|---|
| High-yield savings account | Yes, up to $250,000 | Varies by bank; often 4% to 5% | 1 to 2 business days | Emergency funds, may provide safety |
| Money market account | Yes, up to $250,000 | Varies by bank; often 3% to 5% | Same day or next day | Accessible savings with bank convenience |
| Money market fund | No | Varies by fund; often 4% to 5% | 1 to 3 business days | Accessible savings with slightly higher yield |
| Certificate of deposit (CD) | Yes, up to $250,000 | Varies by term; often 4% to 5% | Locked until maturity | Money you will not need for months or years |
The choice depends on what matters most to you. If safety is the priority, a high-yield savings account or money market account wins. If you want the highest rate and can wait a few days to access your money, a money market fund is competitive. If you can lock money away, a CD often pays slightly more.
Frequently Asked Questions
Can a money market fund lose money?
Yes, though it is uncommon. The fund's value can drop below $1 per share if the securities it holds default or decline sharply. This happened to one major fund in 2008. Most money market funds are very stable, but they are not insured like a bank deposit.
How much interest will I earn in a money market fund?
The yield changes daily based on what the fund earns and the Federal Reserve's interest rate. Current rates vary by fund, but many are in the 4% to 5% range. Check the fund's prospectus or website for its current 30-day yield. Subtract the expense ratio to see your net earnings.
How long does it take to get my money out of a money market fund?
Usually one to three business days. You sell your shares and the cash settles in your brokerage account. Some brokerages offer faster access if the fund is held at the same firm. Check your brokerage's settlement times before opening an account.
Do I pay taxes on money market fund interest?
Yes. Interest from a money market fund is taxable income in the year you earn it. If the fund holds municipal bonds (issued by cities or states), some of that interest may be tax-free, but most money market funds hold Treasury and corporate debt, which is fully taxable.
What is the minimum amount I need to invest in a money market fund?
It varies by fund and brokerage. Many funds have a $1,000 to $3,000 minimum, but some have no minimum at all. Check the fund's prospectus or your brokerage's website to see what applies to the fund you are considering.