Money market fund

A mutual fund that invests in short-term, high-quality debt and aims to keep a stable $1 share price while paying interest-like income.

What it means

A money market fund holds very short-term debt, such as Treasury bills, government agency debt and short-term corporate IOUs. Investors earn income, paid as dividends, that tends to move with short-term interest rates. Most funds try to keep each share at $1, and losses have been rare, but they are possible.

Unlike a money market deposit account at a bank, a money market fund is an investment, not a deposit, so it is not FDIC-insured. At a brokerage, SIPC protection covers the loss of assets if the firm fails, not a drop in their value. Government and Treasury funds carry the least credit risk. Income is generally taxed as ordinary income; income from Treasury holdings may be exempt from state tax, and municipal money market funds can provide federally tax-exempt income.

Example

For example, if $10,000 sits in a money market fund yielding 3% over a year, it earns about $300, though the yield changes as short-term rates change.

How it’s used

Holding cash inside a brokerage or retirement account
Parking money for short-term goals or between investments
Keeping part of an emergency fund earning market-based income

Strengths and weaknesses

Strengths

Low volatility and high liquidity
Income tends to rise when short-term rates rise
Government funds hold very low-credit-risk debt

Weaknesses

Not FDIC-insured and can, rarely, lose value
Yield falls when short-term rates fall
Returns may not keep pace with inflation over long periods

Educational information only, not financial, tax or legal advice. Rules, limits and rates change; check the IRS, your lender or plan, or a qualified professional before acting.