A Money Market Fund is a mutual fund that is required by the US Securities and Exchange Commission to invest in low-risk, high quality securities. Unlike a Money Market Account, a Money Market Fund is not insured by the FDIC (Federal Deposit Insurance Corporation.) However, the underlying investments that make up the fund are of relatively low risk. Investment losses in money market funds have been uncommon but they are in deed possible.

Money market funds typically invest in government securities, certificates of deposit, commercial paper of companies, and other highly liquid and low-risk securities. They attempt to keep their price or net asset value at a constant $1.00 per share: therefore only the yield paid out will go up and down. But a money market’s per share price may fall below $1.00 if the investments perform poorly. While investor losses in money market funds are rare, they are possible.

Investors use Money Market Funds for a variety of reasons. Like other mutual funds, money market fund shares can be bought or sold at any time. However, money market funds also often provide check-writing privileges for shareholders. Some investors use money market funds as a “parking place” for cash between investments because money fund yields are competitive with those of most savings accounts.

Money Market Funds are regulated by the U.S. Securities and Exchange Commission (SEC). SEC rules include conditions intended to stabilize a fund’s $1.00 value. These conditions limit risk in a money market fund’s portfolio by governing the credit quality, diversification, and maturity of money market fund investments.

Only securities with elevated credit quality make it into Money Market Funds. Under SEC rules Money Market Funds may invest only in securities that have been rated in the top two categories of creditworthiness.

In addition to requiring that Money Market Funds invest only in high-quality securities, these funds must maintain a diversified portfolio. This requirement limits a fund’s economic exposure to any single component of the fund. For instance, Money Market Funds may not invest more than 5 percent of assets in the securities of any single issuer, with the exception of securities issued by the federal government.

Money Market Funds must invest in securities that are considered “short-term.” Fund portfolios must have an average maturity of 90 days or less. In fact, most funds’ actual maturity is shorter.

Money Market Funds are issued in two markets, institutional for corporations and other institutions, and retail for individual consumers.

Institutional money funds are high minimum, low expense investments which are marketed to corporations, governments, or fiduciaries. They are often set up so that money is swept to them overnight from a company’s main operating accounts. This is a way for large institutions to quickly get their money into interest bearing accounts.

Retail money funds are offered primarily to individual investors. Their primary use is as temporary holding funds at stock brokerage firms. Retail money market funds hold roughly 40% of all money market fund assets.

Retail money funds invest in short-term debt like US Treasury bills and commercial paper, come in a few different breeds: government-only funds, non-government funds and tax-free funds. You will get a slightly higher yield in the non-government variety, which will invest in high-quality commercial paper and other instruments. Money funds for individuals in mid-2007 are yielding just over 5.0%. However, instruments of the United States Government are usually exempt from state income taxes.

Typically, tax-exempt money market funds, which seek to pay dividends that are exempt from federal income tax and/or state income tax, invest in instruments issued by state and local governments.

Taxable money market fund investments include U.S. Treasury securities, federal agency notes, certificates of deposit, and commercial paper.

Commercial paper consists of short-term notes issued by a wide variety of corporations, such as domestic and foreign firms, banks, and finance companies. About 85 percent of outstanding commercial paper has received the highest short-term rating by at least one credit rating agency. Asset-backed commercial paper, which is a type of commercial paper backed by a pool of assets, accounts for about half of the total commercial paper outstanding. Money market funds hold less than 30 percent of outstanding commercial paper.

Often money market funds are referred to cash equivalent investments because of the ability to redeem the funds quickly and the general level of safety of the principal in the funds.

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