Money Market Fund (MMF)

A money market fund (MMF), also called a money market mutual fund, is an investment fund that invests in short-term, high-quality debt instruments such as Treasury bills, repurchase agreements (repos), commercial paper and certificates of deposit. Its aim is to preserve the value of investors' money, pay a yield close to prevailing short-term interest rates and allow withdrawals on a same-day or next-day basis.

Because shares can be redeemed quickly and their value rarely moves, investors often treat a money market fund like a bank account. It is not one. MMF shares are securities, they are not covered by deposit insurance, and the fund can lose money if one of its holdings defaults or if many investors redeem at once.

The first US money market fund, the Reserve Fund, was launched in the early 1970s, when federal rules capped the interest banks could pay on deposits. Funds that bought money market instruments directly could pass on market rates, and the product grew rapidly during the high-rate years of the late 1970s and early 1980s. Similar funds later spread to Europe and Asia, where they are used heavily by corporate treasurers.

In September 2008, after the collapse of Lehman Brothers, the Reserve Primary Fund, which held Lehman commercial paper, saw its share value fall below one dollar, an event known as "breaking the buck." The resulting withdrawals from similar funds resembled a bank run, and the US Treasury introduced a temporary guarantee program to stop them. Funds came under strain again in March 2020, when the Federal Reserve set up an emergency liquidity facility to support them.

An MMF pools investor cash and buys instruments with short remaining maturities, keeping the weighted average maturity of the portfolio low so that changes in interest rates have little effect on its value. Income from the holdings, minus fees, is paid to investors as a yield that tracks short-term benchmarks such as the federal funds rate or SOFR, typically a few basis points below them after costs.

Some funds use a stable net asset value, usually one dollar or one euro per share, by valuing holdings at amortized cost. Others use a floating net asset value that moves with the market price of the portfolio, often only in the fourth decimal place.

• Government funds invest almost entirely in government securities and repos backed by them. They carry the least credit risk.
• Prime funds also buy corporate and bank debt such as commercial paper, offering slightly higher yields for more credit risk.
• Tax-exempt funds, a US category, hold short-term municipal debt.

In the European Union the categories are constant net asset value, low-volatility net asset value and variable net asset value funds. A newer variant, the tokenized money market fund, records fund shares on a blockchain so they can be transferred or used as collateral in digital-asset markets.

In the United States, MMFs are regulated by the Securities and Exchange Commission under Rule 2a-7 of the Investment Company Act of 1940, which limits the maturity, credit quality and concentration of holdings and sets minimum daily and weekly liquidity levels. Reforms in 2010, 2014 and 2023 tightened these rules, introduced floating values for institutional prime funds and changed how funds may charge fees when redemptions are heavy. In the EU, the Money Market Funds Regulation of 2017 sets comparable rules.

Corporate treasurers use MMFs to hold operating cash above what they need in bank accounts. Payment and e-money firms that must protect customer balances can, in some jurisdictions, hold part of those funds in approved MMFs as a safeguarding or permissible investment option, subject to local rules. Several stablecoin issuers, including the issuer of Tether (USDT), have disclosed holdings of Treasury bills, repos or money market fund shares among their reserve assets.

MMFs perform maturity transformation on a small scale, offering instant liquidity on assets that may take weeks or months to mature. That mismatch, combined with the expectation that shares never lose value, makes them vulnerable to runs during market stress. Regulators and bodies concerned with financial stability have therefore treated them as part of the non-bank financial sector that needs close monitoring.