The Money Market Fund (MMF)

The Money Market Fund (MMF) is a type of mutual fund that invests in short-term, low-risk debt securities, such as

  • Treasury bills
  • certificates of deposit
  • commercial paper

MMFs aim to provide investors with a safe and liquid way to invest their cash reserves while generating a modest return.

MMFs are designed to maintain a stable net asset value (NAV) of $1 per share, which means that the fund’s share price should not fluctuate significantly. MMFs achieve this by investing in securities that are highly rated and have short maturities, typically 90 days or less.

MMFs are popular with individual and institutional investors who want to earn a higher return on their cash than they would receive from a savings account, while still maintaining liquidity and capital preservation. MMFs are also used as a cash management tool by companies and financial institutions.

Investors should be aware that while MMFs are considered low-risk investments, they are not guaranteed by the government or any other entity, and their NAV can fall below $1 per share in rare circumstances. It is also important to note that MMFs are subject to market and interest rate risk, which means that their returns can vary depending on changes in market conditions.

MMF origins

Money market funds (MMFs) were first time approved by the U.S. Securities and Exchange Commission (SEC) in September 1972. It wa done with the aim of providing investors with access to money market yields, particularly those with modest wealth such as small businesses. This was necessary because bank interest rates were capped at the time by Federal Reserve Regulation Q, and Treasury bills, which offered market rates, required minimum investments of $10,000.

From the outset, U.S. MMFs were designed to imitate deposit accounts, with many funds maintaining stable share prices, or net asset values per share (NAVs), fixed at either $1 or $100. By 1974, Fidelity was offering check-writing privileges for its MMFs.

In 1981, the first European money market funds (MMFs) were created in France, motivated by regulatory arbitrage similar to that which led to the development of the U.S. industry. That year, the French government imposed an interest rate cap on a large share of term deposits, which prompted banks to seek ways to offer money market yields to their customers and avoid losing them to competitors. Banks established MMFs through their asset management affiliates, which invested primarily in short-term government debt initially. However, deregulation in the mid-1980s and the opening of French capital markets allowed MMFs to invest more in private short-term debt instruments, such as commercial paper (CP) and certificates of deposit (CDs).

MMF Assets

FED keeps data about the overall amount of Funds kept in MMFs and Currently MMF hold and digest around 5 trillions Dollars assets.

U.S. Money Market Fund Monitor by the Office of Financial Research (OFR) is another great source of information about the MMFs.

MMF types and properties

There are several types of money market funds (MMFs), including:

  • Government MMFs: These funds invest exclusively in government debt securities such as Treasury bills, notes, and bonds and repurchase agreements (repos) backed by these securities. They are considered the safest type of MMF.

  • Prime MMFs: These funds invest in a broad range of short-term debt securities issued by corporations, financial institutions, and governments. They are slightly riskier than government MMFs but offer potentially higher yields. However, prime funds can be slightly riskier than government money market funds, as they invest in a broader range of debt securities and are subject to credit risk. In 2008, during the financial crisis, the Reserve Primary Fund, a large prime money market fund, “broke the buck” and its net asset value fell below $1 per share due to losses on holdings of Lehman Brothers debt.

  • Municipal MMFs: These funds invest in short-term debt securities issued by state and local governments, school districts, and other municipal entities.

  • Taxable MMFs: These funds invest in short-term debt securities that are subject to federal income taxes.

  • Tax-exempt MMFs: These funds invest in short-term debt securities that are exempt from federal income taxes, making them particularly attractive to investors in higher tax brackets.

  • Institutional MMFs: These funds are designed for institutional investors, such as corporations and pension funds, and typically require high minimum investments.

Listing of some MMFs

Symbol MMF Name Funds Assets Type
SPAXX Fidelity® Government Money Market Fund $245 billion Government, Taxable
FDRXX Fidelity® Government Cash Reserves $210 billion Government, Taxable
VMFXX Vanguard Federal Money Market Fund $229 billion Government, Taxable
MJGXX PMorgan U.S. Government Money Market Fund $198 billion Government, Taxable
VMVXX JPMorgan Prime Money Market Fund $72 billion Prime, Taxable
TFDXX BLF FedFund $125 billion Government, Taxable
GOIXX Federated Hermes government obligations fund $140 billion Government, Taxable

MFFs vs. MMDAs

  • Money market deposit accounts (MMDAs) are bank deposit accounts that also invest in short-term, low-risk debt securities, much like money market funds. However, there are several key differences between the two:

  • FDIC Insurance: Money market deposit accounts are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per depositor, per insured bank.

  • Accessibility: Money market deposit accounts can be accessed directly by depositors through their bank, while money market funds can only be accessed through a brokerage account.

  • Minimum investment: Money market funds typically require a minimum investment of $1,000 or more, while money market deposit accounts may have lower minimum deposit requirements.

  • Yield: Money market funds may offer slightly higher yields than money market deposit accounts, but this can vary depending on market conditions and the specific fund or account.

  • Fees: Money market funds may charge management fees and other expenses, while money market deposit accounts typically have no fees.

Money market funds typically aim to preserve capital while generating a modest return, making them a popular choice for investors who want to earn a higher yield than traditional savings accounts or money market deposit accounts (MMDAs).