What is a money market fund, and is it as safe as a bank account?
Money market funds are where many people and companies park cash they may need soon. They are built to be steady, but they are investments, not bank deposits, and that difference matters most in a crisis.
Education only, not investment, tax or legal advice. Crypto-assets are high-risk — risk disclosure.
The short answer
A money market fund is a mutual fund that invests in cash and liquid short-term debt, such as government securities. Many aim to keep a steady $1.00 share price and pay income that tracks short-term interest rates, but they are not bank deposits and are not FDIC-insured.
Key takeaways
- Money market funds pool investors' cash and buy short-term debt; their income generally follows short-term interest rates.
- Most retail and government funds aim for a stable $1.00 share price; institutional prime and tax-exempt funds let the price float.
- A fund 'breaks the buck' when its value per share slips more than half a cent below $1.00, as one large fund did in September 2008.
- Money market funds are not covered by FDIC deposit insurance, unlike money market deposit accounts at banks.
What exactly is a money market fund?
A money market fund is a type of mutual fund: a pool of money from many investors, run by a professional manager. According to the SEC, these funds invest in liquid, short-term debt securities, cash and cash equivalents1. In practice that means short-term lending to governments, banks and companies.
Investors earn income in the form of dividends that generally reflect short-term interest rates2. When central banks raise rates, money market fund income tends to rise; when rates fall, it falls. The SEC describes the funds as relatively low risk compared with most other investments, but with historically lower returns2.
They are a big part of the financial system. When the SEC adopted new rules in 2023 it described money market funds as nearly $6 trillion in size, a deposit alternative for millions of Americans3.
The three main kinds of money market fund Source: [1]
| Type | What it mainly buys | Typical feature |
|---|---|---|
| Government | At least 99.5% in cash, government securities and/or repurchase agreements | Usually keeps a stable $1.00 share price |
| Tax-exempt (municipal) | At least 80% in municipal debt whose interest is exempt from federal and/or state income tax | Retail versions may be stable; institutional versions float |
| Prime | Taxable short-term corporate and bank debt, such as commercial paper | Retail versions may be stable; institutional versions float |
How does a money market fund keep its price at $1.00?
Every mutual fund has a net asset value (NAV): the value of everything it owns, minus what it owes, divided by the number of shares. Most retail and government money market funds use special pricing and valuation conventions to keep that figure at a stable $1.00 per share1. Institutional prime and institutional tax-exempt funds must instead let their NAV float like other mutual funds, so the share price can be a little above or below $1.001.
Figure · Stable versus floating share price
Stable NAV
- Aims for $1.00 per share
- Most retail and government funds
- Must reprice if value moves too far
Floating NAV
- Price can be above or below $1.00
- Institutional prime and tax-exempt funds
- Moves daily like other mutual funds
The stable price has a limit. If a stable-NAV fund's underlying value per share moves more than half a cent away from $1.00, the fund must reprice its shares at something other than $1.00. This is called breaking the buck1.
Worked example
What breaking the buck means in numbers
Suppose you hold 10,000 shares priced at $1.00, worth $10,000. If losses on the fund's holdings push the true value per share below $0.995 (more than half a cent under $1.00), the fund can no longer round to $1.00. At an illustrative repriced value of $0.99, your holding would be worth $9,900. Illustrative figures.
Is a money market fund the same as a bank account?
No, and the similar names cause real confusion. A money market deposit account is a bank account; deposits in it are insured by the FDIC up to $250,000 per depositor, per insured bank, for each account ownership category6. A money market fund is an investment. The SEC states plainly that money invested in one is not guaranteed by the FDIC and that you may lose some or all of the money you invest1.
Three places to keep dollars, compared
| Feature | Money market deposit account | Money market fund | Dollar stablecoin |
|---|---|---|---|
| What it is | A bank deposit | A mutual fund investment | A crypto token designed to track $1 |
| FDIC deposit insurance | Yes, up to the limit6 | No1 | No; crypto assets are not covered6 |
| SIPC brokerage protection | Not applicable | Can apply to fund shares held at a failed broker; does not cover losses in value7 | Stablecoins are not treated as securities for SIPC7 |
A dollar stablecoin can look similar on screen because it also aims to stay at $1, but it is a different product with different legal rights. Our stablecoins explainer covers how those tokens work, and how interest rates work explains why fund income moves with central bank policy.
Can you lose money in a money market fund?
Yes, though it has been rare. One well-known case is the Reserve Primary Fund. It held $785 million of securities issued by Lehman Brothers and became illiquid on 15 September 2008, when it could not meet investors' requests to withdraw their money5. The next day it broke the buck: its value fell below $1 per share, meaning investors would lose money5. Reserve said it would reprice shares at $0.979.
Stress returned in March 2020, when worries about the COVID-19 pandemic led investors to move into cash and short-term government securities. Prime and tax-exempt funds, especially institutional ones, saw large outflows that added to strain in short-term funding markets4.
Figure · Key moments for money market funds
- 15 Sep 2008Reserve illiquid
- 16 Sep 2008Breaks the buck
- Jan 2010Liquidity rules set
- Mar 2020Pandemic outflows
- Jan 2022Reforms proposed
- 12 Jul 2023Reforms adopted
The 2023 reforms raised the minimum liquidity requirements, set by the SEC in 2010 at 10% daily (for taxable funds) and 30% weekly8, to at least 25% of a fund's total assets in daily liquid assets and 50% in weekly liquid assets, and removed funds' ability to impose temporary "gates" that suspend withdrawals4. Institutional prime and institutional tax-exempt funds must now generally charge a liquidity fee when daily net redemptions exceed 5% of net assets, and every money market fund is permitted to charge one1.
Risk warning
Low risk is not no risk
A money market fund can lose value, charge a fee when you withdraw during a rush for the exit, and pay income that falls behind inflation. The SEC also notes that fees can exceed the income a fund earns when interest rates are very low2. Check the fund type and fee terms before treating it as a cash substitute.
How do you check a money market fund before using it?
Four checks before you move cash
- 1
Identify the type
Government, tax-exempt or prime? The type tells you what the fund buys and whether its price can float1.
- 2
Read the fee section
Look at the yearly expense ratio and at when the fund may charge a liquidity fee on withdrawals.
- 3
Confirm it is a fund, not a deposit
If the product is called a money market account, ask whether it is a bank deposit with FDIC insurance or a fund investment.
- 4
Compare income after inflation
Fund income follows short-term rates, and inflation may erode returns over time2. See our inflation explainer.
Fund income compounds if dividends are reinvested, so the same arithmetic as a savings account applies. Our compound interest guide and APR to APY converter help compare yields on a like-for-like basis.
What mistakes do people make with money market funds?
Common beginner mistakes
Confusing the fund with the bank account
A money market deposit account is FDIC-insured up to the limit; a money market fund is not.
Treating $1.00 as a guarantee
The stable price is a target maintained by rules and valuation conventions. A fund can break the buck.
Ignoring the fund type
Prime funds lend to companies and banks; government funds hold mainly government debt and repurchase agreements. Know which borrowers your cash is exposed to1.
Forgetting about withdrawal fees
Some funds must, and others may, charge a liquidity fee when many investors pull money out at once.
Assuming today's yield will last
Income moves with short-term rates. A yield that looks high now can fall quickly when rates are cut.
Frequently asked questions
Are money market funds insured?
What is the difference between a government and a prime money market fund?
A government fund invests at least 99.5% of its assets in cash, government securities and repurchase agreements. A prime fund buys short-term corporate and bank debt such as commercial paper1.
Why do money market fund yields change?
Their dividends generally reflect short-term interest rates2.
What does 'breaking the buck' mean?
The bottom line
A money market fund is a low-risk investment, not a bank deposit. It buys liquid short-term debt, pays income that follows short-term interest rates and, in many cases, aims to hold its price at $1.00. That target has failed before, most famously in September 2008, and no money market fund is FDIC-insured. Know which type you hold, read the fee terms, and compare its income with inflation.
Sources
- Money Market Funds: Investor Bulletin — Investor.gov, U.S. Securities and Exchange Commission, 2024 Primary source
- Money Market Funds — Investor.gov, U.S. Securities and Exchange Commission Primary source
- SEC Adopts Money Market Fund Reforms and Amendments to Form PF Reporting Requirements (Press Release 2023-129) — U.S. Securities and Exchange Commission, 2023 Primary source
- Fact Sheet: Money Market Fund Reforms (Release 33-11211) — U.S. Securities and Exchange Commission, 2023 Primary source
- SEC Charges Operators of Reserve Primary Fund With Fraud (Press Release 2009-104) — U.S. Securities and Exchange Commission, 2009 Primary source
- Understanding Deposit Insurance — Federal Deposit Insurance Corporation Primary source
- What SIPC Protects — Securities Investor Protection Corporation Primary source
- SEC Approves Money Market Fund Reforms to Better Protect Investors (Press Release 2010-14) — U.S. Securities and Exchange Commission, 2010 Primary source
- Report of the President's Working Group on Financial Markets: Money Market Fund Reform Options — U.S. Department of the Treasury, 2010 Primary source
How we checked this page: every figure above links to the numbered source it came from. Spotted an error? Tell the desk — see our editorial policy.
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