What is a money market fund?

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A money market fund is a type of mutual fund that invests in short-term, highly liquid assets. These instruments include cash, cash equivalent securities, and debt-based securities with a high credit rating and a short maturity (such as U.S. Treasuries). Money market funds are designed to provide investors with high liquidity at low risk. Money market mutual funds are another name for money market funds.

A money market fund is not the same as a money market account, despite their similar names (MMA). A money market fund is a type of investment that is sponsored by a fund firm. As a result, there is no principal assurance. A money market account is a form of savings account that pays interest.

Financial organisations provide money market accounts. They are FDIC-insured and often have restricted transaction rights.

Money Market Fund Types

Money market funds are grouped into several forms based on the type of assets invested, the maturity time, and other factors.

Prime Investment Fund

A prime money fund invests in non-Treasury floating-rate debt and commercial paper, such as those issued by corporations, US government agencies, and government-sponsored enterprises (GSEs).

Government Savings Account

A government money fund invests at least 99.5 per cent of its total assets in cash, government securities, and fully collateralized repurchase agreements in cash or government securities.

The Treasury Fund

A Treasury fund invests in traditional US Treasury debt securities such as Treasury bills, Treasury bonds, and Treasury notes.

Tax-Exempt Investment Fund

A tax-exempt money fund provides earnings that are not subject to federal income tax in the United States. A tax-exempt money fund may also be exempt from state income taxes, depending on the specific securities in which it invests. Municipal bonds and other debt securities are the most common types of money market funds.

Some money market funds are designed to attract institutional money by requiring a large minimum investment (typically $1 million). Other money market funds, however, are retail money funds and are available to ordinary investors due to their low minimums.

Today’s Money Market Funds

Money market funds are now one of the most important cornerstones of today’s capital markets. They provide clients with a diversified, professionally managed portfolio with high daily liquidity. Many investors utilise money market funds as a location to lodge their capital until they decide on other assets or for short-term funding needs.

The interest rates available on the various assets that comprise a money market fund’s portfolio are the primary determinants that influence the fund’s performance. Looking at historical data can provide ample information about how money market returns have performed.

During the decade from 2000 to 2010, the Federal Reserve Bank’s monetary policy resulted in short-term interest rates (the rates banks pay to borrow money from one another) lingering around 0%. Because of the near-zero interest rates, money market fund investors witnessed much smaller returns than in previous decades. Furthermore, when rules tightened following the 2008 financial crisis, the number of investable securities shrank.

As major economies throughout the world, including the United States, implemented QE measures in the aftermath of the 2008 financial crisis, a large percentage of the QE money found its way into money market mutual funds as a safe haven.

This fund migration resulted in interest rates remaining low for an extended period of time and money market fund returns declining.

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