Money Market Fund
BeginnerA money market fund is an investment fund that invests in very short-term, high-quality debt securities, such as treasury bills, commercial paper and bank deposits, aiming to preserve capital and provide liquidity with a modest return.
Money market funds are designed to be one of the safest types of investment fund. They are often used as an alternative to bank savings accounts or to hold cash temporarily.
Their holdings typically mature within days or months and come from borrowers with strong credit ratings, so their value changes very little. Some money market funds aim to maintain a stable price per unit, such as 1.00, while others allow their price to fluctuate slightly.
For example, a company with surplus cash might place 5 million in a money market fund, earning interest close to short-term market rates while being able to withdraw the money quickly when needed.
Money market fund yields tend to follow central bank interest rates. When rates are high, these funds can offer attractive returns; when rates are close to zero, their returns are very low.
Money market funds are not risk-free. During the 2008 financial crisis, one well-known fund fell below a value of 1.00 per unit, triggering heavy withdrawals across the industry. Regulators have since tightened rules on their holdings and liquidity. Unlike bank deposits, they are generally not covered by deposit insurance.
For worked examples and full lessons, visit notesbysara.org.