What Are Money Market Funds? - NerdWallet (2024)

FAQs

What Are Money Market Funds? - NerdWallet? ›

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.

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.

Types of money market funds

Investments can include short-term U.S. Treasury securities, federal agency notes, Eurodollar deposits, repurchase agreements, certificates of deposit, corporate commercial paper, and obligations of states, cities, or other types of municipal agencies—depending on the focus of the fund.

For money market funds, that NAV is always set at $1 per share. The upshot of this arrangement is that unlike a stock, or a traditional mutual fund, the value of money market fund shares do not appreciate. You buy in and sell out at $1 a share.

Money market mutual funds. An investment whose objective is to earn interest for shareholders while maintaining a net asset value (NAV) of $1 per share. The portfolio is comprised of short-term (less than one year) securities representing high-quality, liquid debt and monetary instruments.

Retirement money market accounts are money market accounts held in a retirement account such as a 401(k) or an individual retirement account, or IRA. These accounts pay low interest, but provide liquidity and stability.

When saving for a financial goal, it's important to make sure you're utilizing the most beneficial investment type for your goal based on its time horizon. Money market funds make the most sense for short-term goals and generally should not be used for long-term investing, such as retirement.

Because they invest in fixed income securities, money market funds and ultra-short duration funds are subject to three main risks: interest rate risk, liquidity risk and credit risk.

The main difference between a money market account and a mutual fund is that a money market account is an interest-bearing account with check-writing abilities. In contrast, a mutual fund is an investment vehicle that pools money from many investors to purchase stocks, bonds, or other securities.

Money market funds are a type of mutual fund that invests in high quality short-term debt. They pay dividends that generally reflect short-term interest rates.

What are two disadvantages of a money market fund? ›

Although money market accounts are a relatively safe investment, there is always the potential for loss. If you lose your money in a money market account, don't panic! You can take steps to protect yourself and ensure you get your money back.

Six to 12 months of living expenses are typically recommended for the amount of money that should be kept in cash in these types of accounts for unforeseen emergencies and life events. Beyond that, the money is essentially sitting and losing its value.

Money market funds invest in highly liquid securities like cash, cash equivalents, and high-rated debt-based securities. Because they only invest in highly rated securities, money market funds offer a high degree of safety. Money market funds also offer investors higher yields than traditional savings accounts.

The primary purpose of a money market fund is to provide investors a safe avenue for investing in secure and highly liquid, cash-equivalent, debt-based assets using smaller investment amounts. In the realm of mutual-fund-like investments, money market funds are characterized as a low-risk, low-return investment.

Why Is It Called the Money Market? The money market refers to the market for highly liquid, very safe, short-term debt securities. Because of these attributes, they are often seen as cash equivalents that can be interchangeable for money at short notice.

Once you reach retirement age and are taking regular withdrawals from your IRA, it helps to have money ready for those withdrawals in a stable vehicle like a money market as opposed to a variable investment whose value might be down just when you need to access the money.

Lower-risk investment types can help maintain the value of your 401(k), but it is important to consider that lower risk usually means lower returns. Bond funds, money market funds, index funds, stable value funds, and target-date funds are lower-risk options for your 401(k).

Try to avoid making 401(k) withdrawals early, as you will incur taxes on the withdrawal in addition to a 10% penalty. If you are closer to retirement, it is smart to shift your 401(k) allocations to more conservative assets like bonds and money market funds.

Prime money market funds.

U.S. government money market funds are typically regarded as the safest of the three, and within that category, those with a high concentration of Treasuries—with full government backing—would be exposed to a lower likelihood of default risk.

How much cash should you keep in money market account? ›

First, though, make sure you have enough cash set aside to cover three to six months of your living expenses. It's best to keep an emergency fund in a safe, protected account — like an MMA — rather than invest it in riskier vehicles. Once you meet that threshold, you can consider other, higher-growth opportunities.

Both money market funds and CDs are relatively safe, fixed income investments, delivering an income stream in the form of interest or dividends. Money market funds are generally more liquid than bank or brokered CDs.

Because money market funds are investments and not savings accounts, there's no guarantee on earnings and there's even the possibility you might lose money. When interest rates are low, money market rates are also low, earning investors very little.

For the most part, money markets provide those with funds—banks, money managers, and retail investors—a means for safe, liquid, short-term investments, and they offer borrowers—banks, broker-dealers, hedge funds, and nonfinancial corporations—access to low-cost funds.

Over time, common stocks have returned about 8% to 10% on average, including recessionary periods. By investing in a money market mutual fund, which may often yield just 2% or 3%, the investor may be missing out on an opportunity for a better rate of return.

Be aware, though, that any interest earned on a traditional or high-yield savings account—as well as certificates of deposit and money market accounts—is considered taxable income by the IRS.

If you don't have a lot of money to start with, a savings account makes sense because it's possible to find accounts that don't require minimums. If you want to earn a higher APY and you can meet a higher account minimum, a money market account is a good choice.

Money market accounts pay a slightly higher interest rate than traditional savings accounts because banks invest in short-term, highly liquid, low-risk assets with the funds. Many money market accounts come with minimum balance requirements.

Money market accounts can be interest-bearing, meaning the money that's deposited can grow over time with interest. That's one feature that makes them similar to savings accounts.

The seven-day yield is a method for estimating the annualized yield of a money market fund. It is calculated by taking the net difference of the price today and seven days ago and multiplying it by an annualization factor. Since money market funds tend to be very low risk, the higher the seven-day yield the better.

What are the pros and cons of a money market fund? ›

Money market accounts are savings accounts that often offer higher interest rates than regular savings accounts and often incorporate checking account features, like easy access to cash. Yet they can also have downsides: Many have minimum balance requirements and excessive fees.

Stability & safety

While not insured by the FDIC, the funds are required by federal regulations to invest in short-maturity, low-risk investments, making them less prone to market fluctuations than many other types of investments.

Money market funds and other securities held in the Vanguard Brokerage Account are eligible for SIPC coverage. Securities in your brokerage account are protected up to $500,000.

Flexibility: With online and in-person banking options, MMAs can give you quick access to your money by withdrawing, transferring or writing checks. Some banks even give you ATM access with a debit or ATM card.

In 2008, the Reserve Primary Fund, a money-market fund, “broke the buck,” or had its net asset value fall below $1 due to its holdings of $785 million in commercial paper issued by Lehman Brothers.

Since money market accounts are insured by the FDIC or the NCUA, you cannot lose the money you contribute to the account—even in the event of a bank failure.

Advantages of Money Market Accounts

Federal regulations that govern savings account withdrawals don't apply to ATMs. So you can make unlimited ATM withdrawals from your money market account without penalty.

Distributions: Schwab Money Funds pay dividends on the 15th of each month (or on the next business day, if the 15th is not a business day), except that in December dividends are paid on the last business day of the month.

The largest institutional money fund is the JPMorgan Prime Money Market Fund, with over US$100 billion in assets. Among the largest companies offering institutional money funds are BlackRock, Western Asset, Federated Investors, Bank of America, Dreyfus, AIM and Evergreen (Wachovia).

A money market account is an interest-bearing account that's similar to a savings account, but money market accounts commonly allow you to pay bills, use a debit card and write checks. Like savings accounts, money market accounts feature variable interest rates.

How does a money market work? ›

Money market accounts work just like other bank accounts — you deposit money, earn interest and can withdraw your money with relative ease. Money market accounts earn interest, just like savings accounts, but can include options normally only available with checking accounts, such as debit cards and checks.

Money market funds are a type of mutual fund that invests in conservative, lower-risk securities like: Cash. Cash-equivalent securities. Debt-based securities with high credit ratings and short-term maturities, such as U.S. Treasury Bills.

Money market exchange-traded funds (ETFs) are a necessary part of many investors' portfolios because they provide safety and preservation of capital in a turbulent market.

A money market account is an interest-bearing account that's similar to a savings account, but money market accounts commonly allow you to pay bills, use a debit card and write checks. Like savings accounts, money market accounts feature variable interest rates.

Money market investing can be very advantageous, especially if you need a short-term, relatively safe place to park cash. Some disadvantages are low returns, a loss of purchasing power, and that some money market investments are not FDIC insured.

Risk. Both money market accounts and money market mutual funds are considered low-risk investment options. Of the two, the money market account is the lower risk, because it is simply a savings account with a high interest rate.

Yes, money market accounts are safe. The FDIC insured these products for up to $250,000 per depositor, per account ownership category. At credit unions, money market accounts receive the same level of protection from the NCUA.

The $125.3 billion Prime fund will transition to a government money market fund and be renamed Vanguard Cash Reserves Federal Money Market Fund in late September 2020 to better meet investor needs and lower risk.

While money market accounts typically offer higher interest rates than traditional savings accounts, those may not be high enough to keep up with inflation. This means that the purchasing power of your money will decline over time, even if the account balance remains the same.

Easy access: Money market accounts can offer you immediate access to your funds, almost whenever you may need it. MMAs often offer the ability to write checks or access cash via debit card. And know you can typically withdraw without paying a fee as you might with a certificate of deposit (CD).