Money market funds seek to limit exposure to losses due to credit, market, and liquidity risks. Money market funds do not invest their funds randomly throughout the market. Money market funds in the United States are regulated by the Securities and Exchange Commission Investment Company Act of 1940. Rule 2a-7 of the act restricts investments in money market funds by quality, maturity and diversity. Under this act, a money fund mainly buys the highest rated debt which matures in less than 13 months. The portfolio must maintain a weighted average maturity of 90 days or less and not invest more than 5% in any one issuer, except for government and repurchase agreement securities.
According to Rule 2a-7 under the Investment Company Act of 1940, money funds must limit their investments to securities that are rated high quality by a nationally recognized statistical rating organization. In fact, in 1991, the SEC mandated a 5 percent limit on the amount of middle-rated securities, those rated A2, P2 or its equivalent by a nationally recognized statistical rating organization, that a taxable money fund may hold. In addition money market holdings in the funds must have market instruments with maturities of less than 13 months and the average maturity of all holdings in a money fund cannot extend beyond 90 days
Money market funds invest in a pool of short-term, interest-bearing securities in order to maintain a stable value and pay a good quality yield. A money market instrument is a short-term debt instrument or loan issued by the U.S. government, U.S. corporations, and state and local governments. Within these offerings of short term debt instruments, money market instruments have maturity dates of less than 13 months. These instruments are relatively stable because of their short maturities and high quality of the issuer of the securities. Eligible money market securities from these issuers will include commercial paper, repurchase agreements, short-term bonds, notes and bills or other money market products. Money market securities must be highly liquid, rated and have a stable value.
The short-term nature of money market investments makes money market funds less volatile than any other type of fund. Money market funds seek a stable $1.00 net asset value (NAV). Although the net asset value per share of a traditional mutual fund changes daily in response to market factors, money market funds are structured to avoid these changes by seeking to maintain a stable NAV of $1.00 per share. Since the 2a-7 rule was adopted only one fund has ended with a net asset value of less than $1.00. A money market fund having a net asset value dropping below one dollar is referred to as having a “broke the buck”. This event has now occurred twice, once in 1994 and again in 2008. That mutual fund had paid investors $0.96 per share in 1994. The Community Bankers US Government Fund broke the buck in 1994, paying investors 96 cents per share. This fund was an institutional money fund, not a retail money fund, and therefore individuals were not directly affected by the loss. The Reserve Primary money market fund recently “broke the buck” when it said investors would get back only 97 cents of every $1 they had deposited. The fund, one of the largest and oldest money market funds, had invested in Lehman Bros. debt, which became worthless when Lehman filed for bankruptcy.
Money market funds seek to maintain a stable $1 share price to preserve your investment principal while generating dividend income. However, there is no guarantee that you will receive $1 per share when you redeem your shares. Money market funds are not insured by the U.S. government, except for one recent development in 2008.
No user commented in " What Makes a Money Market Mutual Fund "
Follow-up comment rss or Leave a TrackbackLeave A Reply