What are money market funds?

A money market fund (MMF) is a type of mutual fund that invests in cash, cash equivalents and short-term debt securities. Think of MMFs as a cash management investment solution intended to offer portfolio diversification, liquidity and operational ease.

Key takeaways

01

The basics

MMFs are mutual funds designed to offer portfolio diversification and liquidity.

02

Pros and cons

MMFs may contribute to a more diverse portfolio; however, they are not insured or guaranteed.

03

Investing in MMFs

MMFs may complement a larger portfolio. Think about your risk and liquidity needs for expenses.

Types of money market funds

In general, there are three different types of MMFs, each of which invests in different kinds of securities in addition to holding cash and cash equivalents.
Government
Government MMFs invest at least 99.5% of assets in cash, government securities or repurchase agreements that are collateralized by cash or government securities.
Prime
Prime MMFs typically invest in securities issued by corporations, banks and other non government entities.
Municipal
Municipal MMFs can potentially offer tax benefits to an investor, since the earnings are typically exempt from federal and sometimes state income taxes.
THE BASICS

How does a money market fund work?

Like other mutual funds, MMFs sell shares to investors who can then earn income from the portfolios. MMFs blend highly-rated, short-term securities with longer-dated securities (up to 397 days for some funds). Some MMFs seek to offer a constant net asset value (NAV) of $1.00 - while other types of MMFs float their NAV to the fourth decimal place. While yield is not a primary objective, funds seek to offer investors the potential for income that approximates the rate on other overnight or short-term investments. 

MMFs are required by the Investment Company Act of 1940 to maintain sufficient liquidity to meet reasonably foreseeable redemptions. Generally, they must invest at least 10% of their portfolios in assets that can provide daily liquidity, and at least 30% of their portfolios in assets that can provide weekly liquidity, as defined under Rule 2a-7 of the 1940 Act.1

To comply with these liquidity requirements, BlackRock must consider factors that could affect the strategy’s liquidity needs, including market opportunities and shareholder flows. Depending upon the volatility of its cash flows (particularly shareholder redemptions), this may require a fund to maintain greater liquidity than would be required by the daily and weekly minimum liquidity requirements under the Rule.

How are money market funds and mutual funds different?

MMFs are a type of fixed income mutual fund, governed by Rule 2a-7, a provision of the Investment Company Act of 1940. Rule 2a-7 sets stipulated guidelines the funds must adhere to including, but not limited to, credit exposure requirements, liquidity requirements and duration constraints. 

Certain MMFs are permitted to use accounting methods to transact at $1.00 per share.

PROS AND CONS

Potential advantages of a money market fund

MMF investments may be best suited for investors with short-term investment horizons seeking to protect their principal and maintain liquidity. While the performance of MMFs may change over time, investors who are seeking to maintain their capital and liquidity can use MMFs as investments on a daily basis.

Is a money market fund better than a savings account?

Many MMFs do not provide the ability to write checks the way savings accounts can; however, MMFs can offer the potential for greater investment diversification in addition to the current market rate of interest, while savings accounts are subject to the given bank’s offered interest rate. One is not better than the other, and investors should consider their personal circumstances prior to investing in a MMF. Note that MMFs are not insured or guaranteed and may lose value.

Do money market funds ever lose money?

MMFs are investments and not savings accounts, and there is no guarantee of principal or insurance from the Federal Deposit Insurance Company (FDIC). 

Certain MMFs aim to maintain a constant net asset value (NAV) and trade at $1 per share. Other types of funds have a floating NAV, meaning they transact at the market-based value of the securities in the portfolio, rounded to the fourth decimal place.

How is net asset value calculated?

NAV per share of each share in a particular fund is calculated by:

  • + Adding the value of all portfolio securities and other assets belonging to a fund
  • - Subtracting the fund’s liabilities
  • / Dividing the result by the number of outstanding shares in the fund. 
INVESTING IN AN MMF

How much should I invest in money market funds?

While MMFs may be an attractive investment option, how much you should invest depends on your own personal circumstances. Some key questions to consider: 
- Do you want to protect your money or grow your savings? 
- What is your risk tolerance? 
- What are your regular expenses and upcoming liquidity needs? 

Consult a financial professional for advice on whether investing in a MMF might be appropriate for you.

Why invest with BlackRock?

BlackRock’s strategy seeks to deliver results for our clients throughout market volatility, interest cycles and credit events – with a specific focus on preservation of principal, liquidity and yield. We evaluate actual and projected economic and financial conditions in the marketplace, while reviewing our daily stress test outputs to craft the duration, liquidity targets and credit exposures for our strategies. 

We focus on liquidity while making investment decisions based on: 
• Security selection and credit analysis
• Duration and yield curve positioning
• Sector positioning

This approach has been particularly effective during periods of high market volatility, uncertainty and low interest rates – which have included challenges related to European banks, geopolitical issues and debt ceiling events, among others. Of course, past performance is not indicative of future results.

WRAP UP

Money market overview

  • A MMF is a type of mutual fund that invests in cash, cash equivalents and short-term debt securities

  • Like other types of mutual funds, MMFs create a portfolio of securities and sell shares to investors who can potentially earn returns in the form of income and capital gains.

  • Similar to a savings account, MMFs can provide daily liquidity, but they can offer the current market rate of interest – while savings accounts are subject to the given bank’s offered interest rate. Additionally, MMFs can offer the potential for greater investment diversification since the money is pooled to buy securities. Note that MMFs are not insured or guaranteed and may lose value.

    Consult a financial professional for advice on whether investing in a MMF might be appropriate for you.

  • Per FDIC data as of December 2022, the average interest rate for MMFs is 0.23% APY for accounts with balances under $100,000. Rates may differ based on fund type, allocation, and market conditions.

  • The duration of your investment depends on your personal circumstances. MMFs are considered a short-term investment strategy and provide daily liquidity for ease of access.

  • There are several basic types of MMFs, each of which invests in different kinds of securities in addition to holding cash and cash equivalents.

    • Government 
    Government MMFs invest at least 99.5% of assets in cash, government securities or repurchase agreements that are collateralized by cash or government securities.

    • Prime 
    Prime MMFs invest in securities issued by corporations, banks, and other non-government entities. They are riskier than other MMFs but may also offer the potential for higher yields.

    • Municipal
    These tax-managed funds invest in short-term, tax-exempt securities of state and sometimes local governments.