A money market fund is a type of mutual fund that invests in short-term, high-quality debt instruments — Treasury bills, short-term corporate paper, certificates of deposit. The goal is not growth but stability: preserve your principal, provide liquidity, and earn a yield modestly above a traditional savings account.
Disclaimer: Money market funds are not FDIC-insured. While they aim to maintain a stable $1.00 per share value, they are not guaranteed. This article is educational and does not constitute investment advice.
How Money Market Funds Work
Money market funds pool investor money and buy short-duration debt. Most holdings mature in days to weeks, which keeps the fund's sensitivity to interest rate changes very low.
The standard share price is $1.00. When you invest $5,000, you own 5,000 shares at $1.00 each. Income from the underlying holdings flows to you as dividends — typically credited daily, paid monthly — so the share price stays near $1.00 while your balance grows from yield.
"Breaking the buck" — when a money market fund's share price drops below $1.00 — is rare and historically significant. It happened during the 2008 financial crisis when the Reserve Primary Fund broke the buck due to Lehman Brothers exposure. SEC reforms since then have made government money market funds considerably more stable.
Types of Money Market Funds
Government money market funds: Invest at least 99.5% in U.S. government securities and repos collateralized by them. Lowest risk, lowest yield among money market options. Most retail money market funds at brokerages are government funds.
Treasury money market funds: Invest exclusively in U.S. Treasury bills and repos backed by Treasuries. Interest may be exempt from state income taxes — a meaningful advantage in high-tax states.
Prime money market funds: Invest in higher-yielding short-term corporate debt and bank paper. Slightly higher yield than government funds, slightly more risk. Subject to liquidity fees and gates in stress periods.
Municipal money market funds: Invest in short-term municipal securities. Interest is federally tax-exempt and sometimes state-exempt. Relevant for investors in high tax brackets.
Current Yields
Money market fund yields track the federal funds rate closely. When the Fed funds rate is 4–5%, money market funds yield approximately 4–5%. When rates are near zero (as in 2020–2021), yields fall to near zero as well.
Check current 7-day yield, not the stated yield — this is the standardized measure for money market funds, annualizing the most recent 7 days of income.
Money Market Fund vs. High-Yield Savings Account
Both are cash equivalents. The differences:
| Feature | Money Market Fund | High-Yield Savings Account | |---|---|---| | FDIC insurance | No | Yes (up to $250,000) | | Typical yield | Tracks Fed rate closely | Variable, often lags Fed rate | | Liquidity | Instant at brokerages | 1–3 business days (varies) | | Where held | Brokerage/fund account | Bank | | State tax | Treasury MMFs may be exempt | Fully taxable |
For money held inside a brokerage account, money market funds are the natural cash equivalent. For standalone emergency funds, a high-yield savings account with FDIC protection may be preferable.
Where Money Market Funds Make Sense
Cash inside a brokerage account: When you sell stocks or bonds, the proceeds sit somewhere. Most brokerages offer a money market fund as the default "sweep" — your uninvested cash earns yield rather than sitting idle.
Emergency fund alternative: If you're comfortable without FDIC insurance (and you understand the distinctions), Treasury money market funds at a major fund company can serve as an emergency fund with competitive yields.
Short-term savings: Money you'll need in 3–18 months (down payment, tax bill, large purchase) needs to be safe and liquid. A money market fund preserves principal while earning more than a checking account.
During market uncertainty: When investors want to reduce equity exposure but aren't ready to reinvest, money market funds provide a parking place that earns a reasonable return while they wait.
Popular Money Market Funds
Vanguard Federal Money Market Fund (VMFXX): Government fund, competitive yield, low expense ratio. Default settlement fund in Vanguard brokerage accounts.
Fidelity Government Money Market (SPAXX): Government fund at Fidelity, widely used as the default cash position.
Schwab Value Advantage Money Fund (SWVXX): Prime fund at Schwab, typically slightly higher yield than government funds.
Vanguard Treasury Money Market (VUSXX): Treasury-only. Interest exempt from state income tax — valuable in states with high income taxes.
Risks to Understand
Not FDIC-insured: Money market funds are investment products, not bank accounts. While losses are extremely rare, they are not impossible.
Yield risk: Yields fall when interest rates drop. A money market fund earning 5% today might earn 0.5% in a low-rate environment. This is not a long-term wealth-building vehicle.
Inflation risk: If inflation exceeds the fund yield, your purchasing power erodes. Money market funds are appropriate for short-term or stable holdings, not as a substitute for long-term investing.
Money market funds occupy a specific and useful place in a financial plan: for cash that needs to be safe, liquid, and earning something reasonable in the near term. They are not investments in the growth sense — they are a sophisticated cash management tool. For idle brokerage cash, short-term savings goals, and cash reserves during uncertain periods, they do exactly what they promise.