Definition
A Money Market Fund is a kind of mutual fund that invests in short-term, high-quality debt securities to provide a safe and low-volatile investment option. These securities can include Treasury bills or commercial paper. The fund’s main goals are to provide investors with liquidity and capital preservation.
Key Takeaways
- Money Market Fund is a type of mutual fund that invests in highly liquid, short-term financial instruments. These instruments include cash, cash equivalent securities, and high credit rating debt-based securities with a short-term, maturity—usually less than 13 months.
- The primary purpose of a money market fund is to provide investors a safe avenue for investing in secure and highly liquid cash-equivalent assets, while yielding a small profit. They are considered lower-risk investments and are favored by investors looking for a place to park their cash and earn a small return, while preserving their capital.
- The return on a money market fund is typically low. This is because it invests in low-risk, income-producing securities. The fund’s net asset value (NAV) remains a stable $1 per share to keep the investment risk low, but the interest rate can fluctuate.
Importance
Money Market Fund is a crucial term in finance, mainly because it represents a type of mutual fund that offers investors a secure and highly liquid avenue to invest in a diversified portfolio of high-quality, short-term, debt instruments.
These instruments can include treasury bills, government securities, commercial paper, or certificates of deposit.
The primary goals of money market funds are to provide investors with a safe haven, preserve capital and generate modest returns, while maintaining a net asset value (NAV) of $1 per share.
Understanding this term is essential because these funds play a vital role in short-term financing for governments, businesses, and financial institutions, while simultaneously offering individuals a relatively low-risk choice for parking their cash, particularly in volatile or uncertain markets.
Explanation
The primary purpose of a Money Market Fund is to provide investors with a safe place to invest easily accessible, short-term money. It’s generally characterized by its low volatility and short maturity period, usually less than 13 months. These funds are intended to offer investors high liquidity with a very low risk.
Hence, they are often utilized by investors as a place to store cash equivalents or to park money for short periods before investing it elsewhere. This form of investment is particularly appealing during volatile market conditions where investors seek safer investment options. Moreover, Money Market Funds are used as a tool for cash management by both individuals and institutional investors.
They serve as an important cog in the larger financial system as they provide short-term funding for companies and governments. By investing in high-quality, short-term debt securities, these funds provide a vital line of credit to entities such as corporations, banks, and governments. In addition, they’re often used as an option in sweep accounts, retirement plans, and for settling trades.
The high liquidity, safety, and competitive yields relative to a typical savings account make Money Market Funds a popular choice for a range of investor types.
Examples of Money Market Fund
Vanguard Prime Money Market Fund: This is a popular money market fund offered by Vanguard. The fund seeks to provide its investors with a safe avenue to invest their money, principally in high-quality, short-term money market instruments. Its objective is to provide current income while maintaining liquidity and a stable share price.
Fidelity Government Money Market Fund (SPAXX): This is a well-known fund by Fidelity Investments and invests at least
5% of its total assets in government securities, cash and repurchase agreements, all collateralized fully by government securities or cash.
Goldman Sachs Financial Square Government Fund: This fund by Goldman Sachs aims to maximize current income to the extent consistent with the preservation of capital and the maintenance of liquidity by investing exclusively in U.S. government securities, and repurchase agreements collateralized by those securities. The operating policies of this fund generally aim to maintain a constant net asset value of $1 per share.
FAQs about Money Market Fund
What is a Money Market Fund?
A money market fund is a type of mutual fund that invests in short-term, high-quality debt from the government, financial institutions or corporations. It is designed to be a low-risk investment that provides a secure place to park cash and earn a small return.
How does a Money Market Fund work?
Investors’ money is pooled together in the money market fund and invested in low-risk, short-term securities. The fund earns interest from these investments and the income is then distributed among the investors, minus the expenses of running the fund.
What are the risks of a Money Market Fund?
While money market funds are considered low-risk, they are not without their risks. The principal risk is that the yield may not keep up with inflation. However, they also carry credit, market and reinvestment risks.
Are Money Market Funds insured?
Money market mutual funds are not insured by the Federal Deposit Insurance Corporation (FDIC). They are considered to be investments and, as is the case with most investments, you could lose money.
Who should invest in Money Market Funds?
Money market funds are most suited to investors looking for a temporary place to store their cash and earn some income. They are great for short-term financial goals, emergency funds or for holding cash that may be invested elsewhere at a later date.
Related Entrepreneurship Terms
- Short-term Bonds
- Liquidity
- Capital Preservation
- Interest Rate Risk
- Net Asset Value (NAV)
Sources for More Information
- Investopedia: A comprehensive source for finance and investing terminology and concepts including money market funds.
- Fidelity Investments: A major global financial services corporation offering detailed information and services related to money market funds.
- Vanguard: One of the world’s largest investment companies, offering a wide range of information and guidance on various investment options including money market funds.
- U.S. Securities and Exchange Commission (SEC): The official website of the U.S. Securities and Exchange Commission providing government-regulated, reliable information on financial matters including money market funds.
