Money market funds are an additional type of mutual fund. (Money market accounts, in contrast, are a type of bank deposit account and will not be addressed here because they are not securities.) Money market funds invest in high-quality, short-term debt instruments, such as commercial paper, banker’s acceptances, Treasury bills, and repurchase agreements. They are nearly as safe and liquid as bank accounts, with a higher yield. Money market funds pay dividends based on prevailing short-term interest rates. Money market funds are perfect for investors who require liquidity but would like to earn more interest than they would if they kept their money in a bank account. Money market funds in the United States are regulated by the Investment Company Act of 1940. Money market fund securities must be highly liquid and of the highest quality. Money market funds are not as safe as government-insured bank deposits, nor are they guaranteed.
Money market funds are managed to maintain a stable NAV of $1 per share. The debt instruments in which a mutual fund invests usually do not produce capital gains or losses. This quality results in the principal in a money market fund remaining relatively constant and keeping risk close to nil. The $1 NAV price is not guaranteed, but the fund is managed to ensure that it will not go below the $1 NAV price (or “break the buck”) even if the market changes. The “buck” has been “broken” a few times, but it is a very rare occurrence.
