A money market fund is a type of mutual fund that holds short-term debt securities issued by governments and corporations
Unlike a money market account (which is a bank deposit product), a money market fund is an investment fund managed by a professional company. It pools money from many investors and buys very short-term loans — typically those that mature in less than one year. The fund then distributes the interest earned to the investors who own shares in it.
Money market funds are not insured by the Federal Deposit Insurance Corporation (FDIC). They are regulated by the Securities and Exchange Commission (SEC) as mutual funds. This means your principal is not may provide, though the risk of loss is generally considered low because the underlying securities are short-term and issued by stable borrowers.
Key Takeaways
- A money market fund holds short-term debt securities and distributes interest to shareholders, whereas a money market account is a bank deposit that earns interest like a savings account.
- Money market funds are not FDIC-insured, so there is a small risk of losing principal, though historically this risk has been very low.
- The yield on a money market fund changes with interest rates and the fund's holdings, so your earnings are not fixed.
- You can buy money market fund shares through a brokerage account, and many employers offer them within retirement plans.
What securities does a money market fund hold
A money market fund typically owns a mix of U.S. Treasury bills, commercial paper (short-term corporate debt), certificates of deposit (CDs) from banks, and repurchase agreements. All of these mature within 13 months, and most within 90 days. The fund manager chooses which securities to buy based on the fund's stated strategy and the current interest rate environment.
Because the securities are short-term, the fund's value is more stable than a bond fund or stock fund. However, the interest rate the fund earns — and therefore the yield it pays to you — moves up and down with market rates. When the Federal Reserve raises interest rates, money market fund yields typically rise within weeks. When rates fall, yields fall too.
How money market fund yields work
A money market fund does not pay a fixed interest rate. Instead, it calculates a yield based on the interest income from all the securities it holds, minus the fund's expenses. This yield is expressed as an annual percentage and is updated daily. The fund then distributes this income to shareholders, usually monthly or quarterly, depending on the fund.
The yield you see advertised is the current yield, which reflects recent performance. It is not a may provide of future earnings. If interest rates fall, the fund's yield will fall. If the fund manager buys lower-yielding securities, the yield falls. If the fund's expense ratio increases, the yield to shareholders decreases.
Money market funds versus money market accounts at a glance
| Feature | Money Market Fund | Money Market Account |
|---|---|---|
| Type of product | Mutual fund (investment) | Bank deposit |
| FDIC insurance | No | Yes, up to $250,000 |
| Principal may provide | No | Yes |
| Interest rate | Variable yield, changes daily | Variable rate, set by bank |
| How to buy | Brokerage account or retirement plan | Bank or credit union |
| Typical yield range | Varies with market rates | Varies with market rates |
Where to buy a money market fund
You can purchase money market fund shares through a brokerage account at firms like Fidelity, Charles Schwab, Vanguard, or your bank's investment division. You can also hold them inside a retirement account such as an IRA or 401(k) if your plan offers them. Many employers include money market fund options in their 401(k) menus.
To buy a money market fund, you open a brokerage account, deposit money, and then select the fund you want to purchase. The minimum investment varies by fund — some require $1,000 to start, others $2,500 or more. Once you own shares, you can sell them at any time during market hours, though the price per share is always $1 (the fund maintains this stable value).
Expense ratios and fees
Money market funds charge an expense ratio, which is an annual percentage fee deducted from the fund's assets. This fee covers the cost of managing the fund, keeping records, and other operating expenses. Expense ratios for money market funds typically range from 0.10% to 0.50% per year, though some funds charge more and others less.
A lower expense ratio means more of the fund's interest income goes to you. Over time, even a difference of 0.10% per year can add up. When comparing money market funds, always check the expense ratio listed in the fund's prospectus or fact sheet. Some brokerages also offer no-transaction-fee money market funds, meaning you do not pay a commission to buy or sell.
When a money market fund makes sense for your savings
A money market fund is useful if you have cash you want to earn interest on while keeping it relatively safe and liquid. It works well for emergency savings if you are comfortable with the fact that the principal is not insured. It also suits investors who want to hold cash in a brokerage account while deciding where to invest longer-term, or who want a stable holding in a retirement account.
Money market funds are less useful if you need FDIC insurance, want a may provide rate of return, or prefer the simplicity of a bank savings account. They are also not appropriate if you cannot tolerate any risk of principal loss, even a small one. For those situations, a money market account or high-yield savings account at a bank or credit union is a better fit.
Frequently Asked Questions
Can I lose money in a money market fund?
Yes, though it is rare. Because money market funds hold very short-term, stable securities, the risk is low. However, if the securities the fund holds decline in value or default, the fund's share price could fall below $1. This has happened only a handful of times in the history of money market funds, most notably during the 2008 financial crisis.
How often does a money market fund pay interest?
Most money market funds distribute interest monthly or quarterly. The exact schedule depends on the fund. You can reinvest the distributions to buy more shares, or you can have the money deposited into your cash account. Check the fund's prospectus or fact sheet for its distribution schedule.
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 and works like a savings account. A money market fund is an investment fund that is not insured. They have different structures, different risks, and different tax treatment. Do not confuse the two.
What happens to my money market fund when interest rates fall?
When interest rates fall, the yield on the money market fund falls because the fund's new purchases earn less interest. Your existing shares do not lose value, but the income they generate each month will be lower. This is why money market funds are most attractive when interest rates are high.
Can I hold a money market fund in a retirement account?
Yes. Many 401(k) plans, IRAs, and other retirement accounts offer money market fund options. Holding a money market fund in a retirement account works the same way as holding it in a regular brokerage account, except the distributions are not taxed until you withdraw the money.