{"id":245706,"date":"2012-01-24T11:58:10","date_gmt":"2012-01-24T18:58:10","guid":{"rendered":"https:\/\/www.getrichslowly.org\/?p=245706"},"modified":"2023-09-21T14:59:12","modified_gmt":"2023-09-21T20:59:12","slug":"what-are-money-market-funds","status":"publish","type":"post","link":"https:\/\/www.getrichslowly.org\/what-are-money-market-funds\/","title":{"rendered":"What are money market funds?"},"content":{"rendered":"<p>A money-market fund is a very low-risk type of&nbsp;<a title=\"An Introduction to Mutual Funds\" href=\"https:\/\/www.getrichslowly.org\/what-are-mutual-funds\/\">mutual fund<\/a>, meant to be as close to cash as possible while still earning a modest return. It is different from a&nbsp;<a title=\"An Introduction to Money Market Accounts\" href=\"https:\/\/www.getrichslowly.org\/best-money-market-accounts\/\">money-market account<\/a>, which is a type of deposit account in which the entire principal is invested in money-market funds by the bank. One key difference is that money-market accounts are FDIC-insured, while money-market funds, like all mutual funds, are not.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"short-term-savings\"><\/span>Short-term savings<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>Money-market funds are meant to be very &#8220;liquid,&#8221; meaning they are easier to cash out at any time without expecting a loss, and thus are used for many short-term savings needs:<\/p>\n<ul>\n<li>an&nbsp;<a title=\"How to Start an Emergency Fund\" href=\"https:\/\/www.getrichslowly.org\/emergency-fund\/\">emergency fund<\/a><\/li>\n<li>a savings account for a down payment for a&nbsp;house<\/li>\n<li>a&nbsp;<a title=\"Savings for College\" href=\"https:\/\/www.getrichslowly.org\/college-savings-the-basics-of-saving-for-college\/\">college fund<\/a>&nbsp;for teenagers<\/li>\n<li>a savings fund for travel or other near-term needs<\/li>\n<li>a &#8220;parking place&#8221; for money while you decide how to invest it<\/li>\n<\/ul>\n<p>The investments that make up a money-market fund are &#8220;cash and cash equivalents.&#8221; These are limited to&nbsp;highly rated&nbsp;debt issues (think AAA and AA) that mature in 13 months or less. Typically, money-market funds are mostly invested in U.S. treasury bonds,&nbsp;<a title=\"CDs\" href=\"https:\/\/www.getrichslowly.org\/best-cd-rates\/\">CDs<\/a>&nbsp;from highly rated U.S. and foreign banks, and commercial paper (similar to bonds, with much shorter maturities, and usually issued by banks or very highly rated companies).<\/p>\n<h2><span class=\"ez-toc-section\" id=\"retirement-savings\"><\/span>Retirement savings<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>A money-market fund is an investment choice you can make in most retirement accounts, including&nbsp;<a title=\"What is a Roth IRA and why should you care?\" href=\"https:\/\/www.getrichslowly.org\/what-is-a-roth-ira-and-why-should-you-care\/\">IRAs<\/a>. Many&nbsp;<a title=\"How Much Do You Need to Save For Retirement?\" href=\"https:\/\/www.getrichslowly.org\/how-much-to-save-for-retirement\/\">retirement savings accounts<\/a>, especially those managed on behalf of employees &#8212; 401(k) accounts and the like &#8212; make the default investment into money market funds. These default investments are made for funds that allow participants to make decisions about where to invest, also known as &#8220;elections.&#8221; If you don&#8217;t make an election, the fund manager is required to put your money into something relatively safe with at least a small expected return.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"growth-expectations\"><\/span>Growth expectations<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>The average annual growth for money-market funds tends to be at the low end of the spectrum, a reflection of the low risk associated with these funds. The&nbsp;<a title=\"Fidelity Cash Reserves Fund\" href=\"https:\/\/fundresearch.fidelity.com\/mutual-funds\/composition\/316067107\" target=\"_blank\" rel=\"noopener\">Fidelity Cash Reserves Fund<\/a>, one of the largest such funds available, shows historic annual returns between a low of 0.02 percent (2010) and a high of 4.97 percent (2007) over the past decade &#8212; comparable to the interest rates in an ordinary&nbsp;<a title=\"Best Savings Accounts for 2011\" href=\"https:\/\/www.getrichslowly.org\/best-online-high-yield-savings-accounts\/\">bank savings account<\/a>.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"loss-of-principal-is-rare\"><\/span>Loss of principal is rare<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>Money-market funds are meant to maintain &#8220;nominal value&#8221; &#8212; in other words, the principal value is never expected to fall. If you have a $1,000 investment in a money-market fund, your account balance should never fall below $1,000. If it does, it&#8217;s called &#8220;breaking the buck&#8221; and it&#8217;s very rare. It has happened recently, though: in 2008, during the financial crisis, the&nbsp;<a title=\"SEC Press Release: Reserve Primary Fund Distributes Assets to Investors\" href=\"https:\/\/www.sec.gov\/news\/press\/2010\/2010-16.htm\" target=\"_blank\" rel=\"noopener\">Reserve Primary Fund became &#8220;illiquid&#8221;<\/a>&nbsp;(it was unable to issue cash to investors who asked to withdraw their money) because it was invested in securities issued by the ill-fated Lehman Brothers. Even these investors eventually recovered 98 cents on the dollar.<\/p>\n<p>Money-market funds&nbsp;<em>are<\/em>&nbsp;mutual funds, but most mutual funds hold at least a portion of their portfolio in money-market funds, given their relative safety.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>A money-market fund is a very low-risk type of&nbsp;<a title=\"An Introduction to Mutual Funds\" href=\"https:\/\/www.getrichslowly.org\/what-are-mutual-funds\/\">mutual fund<\/a>, meant to be as close to cash as possible while still earning a modest return. It is different from a&nbsp;<a title=\"An Introduction to Money Market Accounts\" href=\"https:\/\/www.getrichslowly.org\/best-money-market-accounts\/\">money-market account<\/a>, which is a type of deposit account in which the entire principal is invested in money-market funds by the bank. One key difference is that money-market accounts are FDIC-insured, while money-market funds, like all mutual funds, are not.<\/p>\n<h2>Short-term savings<\/h2>\n<p>Money-market funds are meant to be very &#8220;liquid,&#8221; meaning they are easier to cash out at any time without expecting a loss, and thus are used for many short-term savings needs:<\/p>\n<ul>\n<li>an&nbsp;<a title=\"How to Start an Emergency Fund\" href=\"https:\/\/www.getrichslowly.org\/emergency-fund\/\">emergency fund<\/a><\/li>\n<li>a savings account for a down payment for a&nbsp;house<\/li>\n<li>a&nbsp;<a title=\"Savings for College\" href=\"https:\/\/www.getrichslowly.org\/college-savings-the-basics-of-saving-for-college\/\">college fund<\/a>&nbsp;for teenagers<\/li>\n<li>a savings fund for travel or other near-term needs<\/li>\n<li>a &#8220;parking place&#8221; for money while you decide how to invest it<\/li>\n<\/ul>\n<p>The investments that make up a money-market fund are &#8220;cash and cash equivalents.&#8221; These are limited to&nbsp;highly rated&nbsp;debt issues (think AAA and AA) that mature in 13 months or less. Typically, money-market funds are mostly invested in U.S. treasury bonds,&nbsp;<a title=\"CDs\" href=\"https:\/\/www.getrichslowly.org\/best-cd-rates\/\">CDs<\/a>&nbsp;from highly rated U.S. and foreign banks, and commercial paper (similar to bonds, with much shorter maturities, and usually issued by banks or very highly rated companies).<\/p>\n","protected":false},"author":3092,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":[],"categories":[492],"acf":[],"_links":{"self":[{"href":"https:\/\/www.getrichslowly.org\/wp-json\/wp\/v2\/posts\/245706"}],"collection":[{"href":"https:\/\/www.getrichslowly.org\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.getrichslowly.org\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.getrichslowly.org\/wp-json\/wp\/v2\/users\/3092"}],"replies":[{"embeddable":true,"href":"https:\/\/www.getrichslowly.org\/wp-json\/wp\/v2\/comments?post=245706"}],"version-history":[{"count":0,"href":"https:\/\/www.getrichslowly.org\/wp-json\/wp\/v2\/posts\/245706\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.getrichslowly.org\/wp-json\/wp\/v2\/media?parent=245706"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.getrichslowly.org\/wp-json\/wp\/v2\/categories?post=245706"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}