Each mutual fund will have an investment objective.  The investment objective will dictate some of the holdings and investment restrictions the type of money fund will have.  As an example, government only money market funds will only invest in U.S. government obligations and those backed by U.S. government obligations.  Other funds will specify the quality of the investments they can hold, noting acceptable ratings as assigned by major rating agencies such as Standard & Poor’s, Moody’s Investors Service or Fitch Ratings.

Some investment restrictions handed down by the SEC are applicable to all money funds.  For example, the average maturity of a money fund’s portfolio cannot exceed 90 days, nor can it invest 100 percent of a portfolio so that more than 5 percent is invested in the obligations of any one issuer. Most money funds restrict themselves even further than SEC regulations.

Regulated diversification is a required property of money market mutual funds.   Another safety feature is the SEC-enforced restriction that prohibits taxable money funds from investing more than 5 percent of their assets in a single issuer, with exception to government issues. This, of course, prevents the funds from major losses in the event of default on a particular money-market instrument.

Required minimum money market fund investment requirements.  The money market funds purchase of highly rated paper is another regulated practice.  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, NRSRO.   In 1991, the SEC mandated a 5 percent limit on the amount of middle-rated securities, rated A2, P2 or its equivalent by an NRSRO, which a taxable money fund may hold.  But most funds have voluntarily restricted themselves even further than the SEC regulations, investing only in securities carrying the highest ratings.

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