Money Market Fund
A money market fund is a mutual fund that invests in short-term, high-quality debt such as Treasury bills and commercial paper. It aims to keep your money stable and easy to access while paying interest, but unlike a bank deposit it is not FDIC-insured.
Investors often park cash in money market funds between trades or while waiting for opportunities. They pay interest close to short-term rates, can usually be sold quickly and rarely move in price. But "money market" doesn't mean guaranteed. This entry explains what these funds hold, the main types and how they compare with bank accounts.
- Category
- Trading Basics
- Reading time
- 3 min
- Also called
- Money market funds, Money market mutual fund, MMF
- Updated
Money market funds in plain words
Money market funds are open-end mutual funds that invest in short-term debt such as Treasury bills, municipal bills and short-term corporate and bank debt with low credit risk.1
They can suit investors looking for a low-risk investment with relatively easy access to their money.2
Unlike many bank money market accounts, money market funds are not covered by FDIC insurance.2
How a money market fund works, step by step
Investors buy shares
Often through a broker's cash sweep. See Cash Position.
The fund buys short-term debt
Mostly maturing within a year. See Treasury Bills, Notes and Bonds.
Interest accrues daily
Passed on as dividends. See Dividend.
Prices stay steady
Many aim for a stable share value. See Net Asset Value.
Withdraw when needed
Usually sold within a day.
Yield tracks rates
It moves with short-term interest rates. See Interest Rate.
Worked examples
Example 1 — Interest earned
$900 a yearYou keep $20,000 in a fund yielding 4.5% a year.
| Yearly income | $20,000 × 4.5% = $900 |
| Monthly (roughly) | $900 ÷ 12 = $75 |
Because the fund holds short-term debt, its yield closely follows short-term interest rates.1
Example 2 — Rates fall
Income fallsShort-term rates drop and the yield falls from 4.5% to 3.0%.
| New yearly income | $20,000 × 3% = $600 |
| Change | −$300 |
Money market yields adjust quickly to rate changes, so income isn't locked in. See Rate Hike and Rate Cut.
Example 3 — Tax-exempt version
≈ 4.41% equivalentA tax-exempt fund yields 3%; you pay 32% federal tax.
| Taxable-equivalent yield | 3% ÷ 0.68 ≈ 4.41% |
Tax-exempt money market funds hold state and local debt whose interest is generally free of federal income tax.2 See Municipal Bonds.
Money market fund vs savings account
| Aspect | Money market fund | Bank savings account |
|---|---|---|
| Provider | Fund company or broker | Bank or credit union |
| FDIC insurance | No | Yes, up to limits |
| Yield | Tracks short-term rates | Set by the bank |
| Risk | Low but not zero | Very low within limits |
How investors use money market funds
Parking cash
Between trades or investments.
Emergency reserves
Liquid savings with some yield.
Brokerage sweep
Uninvested cash earns interest. See Cash Account.
Defensive allocation
Lowering risk in uncertain markets. See Risk-On and Risk-Off.
Advantages and disadvantages
Advantages
- Low risk and stable value.
- Easy access to money.
- Yield follows short-term rates.
Disadvantages
- Not FDIC-insured.
- Yields fall when rates drop.
- Returns may lag inflation.
Going deeper
Read as far as you need. Each level builds on the one before it.
Three main types
Beginner
Government funds hold mainly federal government securities, prime funds mainly corporate debt, and tax-exempt funds state and local government obligations.2
Short maturities
Intermediate
Money market securities typically mature in under 12 months, which limits interest rate and credit risk.1 See Interest Rate.
SIPC, not FDIC
Advanced
Held at a brokerage, fund shares are protected as securities by SIPC against broker failure, which is different from insurance against investment losses.2
Common mistakes
Assuming it's a bank deposit
It isn't FDIC-insured.
Ignoring fees
Expense ratios eat into low yields. See Expense Ratio.
Holding too much for too long
Inflation can erode real value.
Confusing it with a money market account
Different products.
Check your understanding
Test yourself before moving on. Each answer comes with an explanation.
Key points to remember
- Money market funds hold short-term, high-quality debt.
- They offer stability, liquidity and modest yield.
- Types: government, prime and tax-exempt.
- They are not FDIC-insured.
- Yields move with short-term interest rates.
Frequently asked questions
Can you lose money in a money market fund?
How quickly can I get my money?
Is it the same as a money market account?
Further learning
- Mutual Fund
The fund structure behind it.
- Treasury Bills, Notes and Bonds
What government funds hold.
- Risk-Free Rate
Why yields track T-bills.
- Net Asset Value
How fund prices are set.
Sources
This article is written in our own words. The sources below support the specific facts, rules and figures marked with a number in the text. Links open the original publisher’s page.
- Corporate Finance Institute. Money Market Funds (opens in a new tab) Checked .
- FINRA. Taking a Look at Money Market Funds (opens in a new tab) Checked .
Educational content, not financial advice. Examples use hypothetical prices and simplified costs; actual fees, margin rules and regulations vary by broker, market and country. We are not affiliated with any publisher linked above. Last reviewed . Report an error or request a source credit.