A money market fund is a type of mutual fund that has relatively low risks compared to other mutual funds and most other investments and historically has had lower returns. Money market funds invest in high quality, short-term debt securities and pay dividends that generally reflect short-term interest rates. Many investors use money market funds to store cash or as an alternative to investing in the stock market.
There are many kinds of money market funds, including ones that invest primarily in government securities, tax-exempt municipal securities, or corporate and bank debt securities. In addition, money market funds are often structured to cater to different types of investors. Some funds are intended for retail investors, while other funds that typically require high minimum investments are intended for institutional investors. The rules governing money market funds vary based on the type of money market fund.
Government and retail money market funds try to keep their net asset value (NAV) at a stable $1.00 per share using special pricing and valuation conventions. Institutional prime money market funds must allow their NAV to float based on the current market value of the securities in their portfolios.
Money market funds, like all mutual funds, are redeemable on demand. Registered open-end companies (the legal term for mutual funds) may not suspend the right of redemption and must pay redemption proceeds within seven days, except in certain emergencies or for such other periods as the Commission may by order permit for the protection of security holders of the company. In addition, in certain circumstances, non-government money market funds can charge fees on redemptions (liquidity fees) and can suspend redemptions temporarily (redemption gates). Government money market funds can voluntarily opt into using these tools when certain circumstances occur, if the ability to do so is disclosed in the fund prospectus. Finally, a money market fund can also permanently suspend redemptions in certain circumstances if a fund’s board of directors decides to liquidate the fund.
Before investing in a money market fund, you should carefully read all of the fund’s available information, including its prospectus (or summary prospectus, if the fund has one), and its most recent shareholder report.
Money market funds are regulated primarily under the Investment Company Act of 1940 and the rules adopted under that Act, particularly Rule 2a-7 under the Act. Unlike a “money market deposit account” at a bank, money market funds are not federally insured.