Money market fund

What It Means

A money market fund is a type of mutual fundMutual fundAn SEC-registered fund that pools money from many investors to buy stocks, bonds or other securities, with shares you can sell back to the fund each business day. See more that invests in cash, cash equivalents and liquid, short-term debt. The SEC describes these funds as relatively low risk compared with most other investments, with historically lower returns to match. Some kinds try to keep a stable share price of $1.00, but a money market fund is an investment and isn't insured by the FDIC. A money market accountMoney market accountA bank or credit union deposit similar to savings that may pay a higher, tiered rate for bigger balances and often allows checks or a debit card. See more at a bank or credit unionCredit unionA not-for-profit financial cooperative owned by its members, offering accounts and loans to people within the field of membership its charter sets. See more is a different product: an insured deposit.

How People Say It

• "My brokerage cash sits in a money market fund."
• "It's basically a dollar a share."
• "Wait, is that the fund or the bank account?"

The Breakdown

An example. Theo sells some shares in his brokerage accountBrokerage accountAn account at a brokerage firm that holds your cash and the stocks, bonds, funds and ETFs you buy and sell through that firm. See more, and the $12,000 lands in the firm's money market fund while he decides what to do next. His bank also offers a money market account, and he treats the two as the same thing.

Where it goes wrong. Their names are almost identical, while the products differ. The account at his bank is a deposit, and the FDIC covers it up to $250,000 per depositor, per insured bank, for each ownership category. Over in his brokerage account, the fund is a mutual fund. According to the SEC, money in a money market fund isn't guaranteed by the FDIC the way a bank account is, so it's an investment, even though it's a cautious one.

Share prices, by fund type. The SEC's bulletin sorts funds by how their share price works:

A government money market fund puts at least 99.5% of its total assetsAssetsThings you own that are worth money, such as cash, investments, a home or a car. Your assets minus your debts is your net worth. See more in cash, US government securities and repurchase agreements fully backed by those.

What to watch for

• The word "fund". It means an investment, not a deposit.
• The type. A government fund holds almost entirely government securities and cash.
• The cost. Like any mutual fund, it charges an expense ratioExpense ratioThe yearly share of a fund's assets used to pay its running costs, so a 0.40% expense ratio costs $40 a year for every $10,000 invested. See more, which comes out of what you earn.

Good to Know

The SEC's investor bulletin says money market funds have relatively low risk compared with other mutual funds and most other investments, and historically lower returns. Some funds try to keep a stable $1.00 share price, and that price isn't guaranteed. The FDIC doesn't insure mutual funds, including money market funds, even when a bank sells them. Read the fund's prospectus to see which type it is, what it holds and what it charges.

Related Terms and Categories

• Money market account

  A bank or credit union deposit similar to savings that may pay a higher, tiered rate for bigger balances and often allows checks or a debit card.

• Mutual fund

  An SEC-registered fund that pools money from many investors to buy stocks, bonds or other securities, with shares you can sell back to the fund each business day.

• High-yield savings account

  A savings account paying a variable interest rate that's generally higher than a traditional savings account's, often offered by online banks.

• Emergency fund

  Money set aside only for unplanned costs, like a car repair, a medical bill or a lost paycheck, kept where you can reach it quickly.

• Expense ratio

  The yearly share of a fund's assets used to pay its running costs, so a 0.40% expense ratio costs $40 a year for every $10,000 invested.

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