What are money market funds?

If you’ve ever looked at your checking account balance and thought, “You’re doing great, sweetienow do literally
anything,” then you’ve already met the emotional need that money market funds were built to solve.
Money market funds (often shortened to MMFs) are designed to be a place to park cash you want to keep
handywhile still earning a return that has at least heard of interest rates.

They’re not flashy. They’re not trying to beat the S&P 500. They’re the financial equivalent of a good umbrella:
you don’t brag about owning one, but you’re grateful when you need it.
In this guide, we’ll break down what money market funds are, what they invest in, how they make money, what risks
still exist (yes, there are a few), and how to pick the right type for your goalswithout drowning in jargon.

Money market funds, in plain English

A money market fund is a type of mutual fund that invests in very short-term, highly liquid debt
instrumentsthink Treasury bills, government-backed repurchase agreements, certificates of deposit, and other
high-quality, short-maturity securities. The mission is simple:
keep the value stable and pay income that generally tracks short-term interest rates.

Most money market funds aim to keep their share price at $1.00 (called a “stable net asset value,”
or stable NAV). Instead of the share price bouncing up and down like a stock fund, investors typically earn
returns through dividends that accrue over time.

Why do people use them?

• Cash parking: Holding money temporarily before investing, buying a home, or paying taxes.
• Emergency funds: Keeping cash accessible while earning a competitive yield (with trade-offs).
• Brokerage “settlement” cash: Many brokerages sweep idle cash into a money market fund.
• Short-term goals: Vacation funds, tuition due soon, a “future car” stash, etc.

How money market funds work (and how they pay you)

When you buy shares of a money market fund, your money is pooled with other investors. A professional manager
uses that pool to buy short-term securities. The fund earns interest from those holdings and distributes that
income to shareholdersusually monthly, though the yield is quoted as an annualized rate (like a savings account).

What they typically invest in

Exact holdings vary by fund type, but common instruments include:

• U.S. Treasury bills and other government securities
• Agency securities issued by government-sponsored entities
• Repurchase agreements (repos) backed by government securities
• Certificates of deposit (CDs) from banks
• Commercial paper issued by highly rated corporations (more common in “prime” funds)
• Municipal short-term debt (for tax-exempt money market funds)

The big idea is short maturities and high credit qualityso the fund can meet
investor redemptions quickly and reduce the chance of nasty surprises.

The three main types of money market funds

In the U.S., money market funds are commonly grouped into three broad categories. Knowing which one you’re in is
like knowing whether your “milk” is dairy, oat, or “I found this behind the fridge.”

1) Government money market funds

These invest primarily in cash, U.S. government securities, and/or repos collateralized by government securities.
They’re generally viewed as the most conservative type of money market fund because the underlying instruments
are tied closely to U.S. government credit.

Best for: Many everyday cash needs, emergency funds (with caveats), and investors who want the
“sleep better” version of cash investing.

2) Prime money market funds

Prime funds can invest in a wider range of high-quality, short-term debt, including commercial paper and bank
obligations. Because the menu is broader, prime funds often can offer slightly higher yieldsespecially
when credit spreads widen.

Trade-off: A bit more credit risk and, in some cases, additional rules around liquidity fees
depending on whether the fund is institutional or retail.

3) Tax-exempt (municipal) money market funds

These invest in short-term municipal securities. The goal is to provide income that is often exempt from federal
income tax, and sometimes also exempt from state tax if the fund focuses on a specific state.

Best for: Investors in higher tax brackets who hold cash in a taxable brokerage account and want
to improve after-tax yield.

Money market fund vs. money market account: same name, different species

This confusion happens constantlybecause financial marketing loves a good identity crisis.

Money market funds

• What it is: A mutual fund investment.
• Insurance: Not FDIC-insured.
• Where you buy it: Typically through a brokerage or fund company.
• How you earn: Dividends based on the fund’s yield, net of expenses.

Money market accounts (bank deposit accounts)

• What it is: A deposit account at a bank or credit union.
• Insurance: Usually FDIC/NCUA insured up to applicable limits.
• Where you open it: At a bank/credit union.
• How you earn: Interest paid by the institution.

If you want deposit insurance, you’re generally talking about a bank product. If you want a
market-based cash investment inside a brokerage, you’re generally talking about a money market fund.

Are money market funds safe?

“Safe” is a vibe, not a guaranteebut money market funds are designed to be among the lowest-volatility investments
available. Still, it’s important to understand what “low risk” actually means.

Key risks to know

1) They are not FDIC-insured

Money market funds are investments. That means they do not come with FDIC protection the way bank accounts do.
Your brokerage account may have SIPC coverage, but SIPC generally protects against broker failurenot market losses
in your investment’s value.

2) “Breaking the buck” (rare, but famous)

Most money market funds try to maintain a $1.00 share price. “Breaking the buck” means the NAV falls below $1.00.
It’s uncommon, but it has happenedmost notably during periods of severe market stress.
When this happens, investors may receive less than they invested.

3) Liquidity pressure in stressful markets

If many investors try to pull money out at once, a fund may have to sell securities quickly. Regulations are meant
to reduce this risk, but it’s one reason why regulators have continued to refine money market fund rules.

4) Inflation risk

Even if a money market fund feels stable, inflation can still eat purchasing power. If inflation is higher than
your yield after taxes and fees, your “safe cash” is quietly shrinking. It’s polite. It’s also annoying.

Regulation: why money market funds have so many rules

Money market funds in the U.S. are regulated under rules that focus on credit quality, maturity limits, and
liquidity requirements. The goal is to keep funds resilientespecially during market stress, when investors
might otherwise rush for the exits.

In recent years, the SEC has adopted additional reforms, including changes that increase minimum liquidity
requirements and adjust how certain fees can be applied. In broad strokes, reforms have aimed to:
(1) strengthen daily and weekly liquidity buffers,
(2) reduce incentives for “runs,” and
(3) clarify or change how liquidity fees may be imposed for certain institutional funds.

Translation: regulators are trying to make sure money market funds stay boringeven when markets are not.

How yields on money market funds are determined

A money market fund’s yield tends to follow short-term interest rates because the fund holds
short-term instruments that mature and roll over frequently. When the Federal Reserve raises short-term rates,
yields on new T-bills, repos, and other instruments often rise, and money market fund yields typically rise too
(usually with a lag). When rates fall, yields usually drift down.

What can cause one fund to yield more than another?

• Expenses: Higher expense ratios reduce the yield you actually receive.
• Portfolio mix: Government vs. prime vs. municipal holdings affect yield and risk.
• Management and scale: Some funds have pricing advantages in the market.
• Tax status: Tax-exempt yields should be compared on an after-tax basis.

Taxes: how money market fund income is taxed

Money market fund payouts are typically reported as dividends, but for many taxable money market
funds those dividends are generally treated like ordinary income for federal tax purposes.
(Not the fun “qualified dividend” kindmore like the “hello, marginal tax bracket” kind.)

Taxable money market funds

Dividends from taxable money market funds are generally taxed as ordinary income. You may receive a Form 1099-DIV
showing ordinary dividends, and you report them on your return.

Tax-exempt municipal money market funds

Municipal money market funds may distribute “exempt-interest dividends,” which are often exempt from federal income
tax. However, certain municipal interest can still be taxable in specific circumstances (for example, state tax
treatment varies, and some municipal bond interest may have special rules).

Practical tip: Compare a muni fund’s yield to a taxable fund using a
tax-equivalent yield:

Tax-equivalent yield = tax-free yield ÷ (1 − your marginal tax rate)

Example: If a municipal money market fund yields 3.0% and your federal marginal rate is 24%, your tax-equivalent
yield is 3.0% ÷ (1 − 0.24) = 3.0% ÷ 0.76 ≈ 3.95%. That’s the “apples-to-apples” yield you’d need from a taxable fund
to match the muni fund after federal taxes.

How to choose the right money market fund

Picking a money market fund is less about “winning” and more about matching the tool to the job. Here’s a
decision framework that won’t make your eyes glaze over.

Step 1: Decide what the money is for

• Immediate access / emergency cash: Consider conservative government funds, and weigh FDIC-insured
  options if insurance matters most.
• Short-term goal (3–18 months): Government or prime funds may work depending on your risk tolerance.
• Taxable brokerage cash in a higher bracket: Consider municipal money market funds and compare
  tax-equivalent yields.
• Business cash management: Liquidity and operational access may matter as much as yield.

Step 2: Check the fund type and share class

Retail vs. institutional rules and pricing can differ. Make sure you’re comparing the same category and share class
when looking at yields and expenses.

Step 3: Compare these four metrics

• 7-day yield (or similar yield metric): A commonly quoted snapshot of recent yield.
• Expense ratio: Lower expenses generally help you keep more of the yield.
• Minimums and access: Any minimum investment, transaction limits, or settlement quirks.
• Liquidity and holdings style: Government-only vs. broader prime exposure vs. muni.

Step 4: Think about where the fund lives

Many people use money market funds inside a brokerage account as a “cash hub.” If your brokerage uses a money market
fund as a settlement vehicle, that can make buying investments or paying bills easier.
Convenience is a featuresometimes worth more than a tiny yield difference.

Concrete examples (because money deserves a real-life audition)

Example 1: Parking a house down payment

You plan to buy a home in 9 months and have $60,000 earmarked for a down payment. Your priorities are stability and
liquidity. A government money market fund may be a reasonable option for brokerage-based cash, but you might also
compare FDIC-insured high-yield savings accounts or CDs. If you can’t tolerate any chance of principal fluctuation,
deposit products may feel more comfortable.

Example 2: Emergency fund with “better-than-checking” yield

You keep $15,000 for emergencies. A money market fund can offer convenient access and competitive yield when rates
are higher. The trade-off is that it’s not FDIC-insured and extreme-market edge cases exist. Many people split the
difference: part in an insured savings account, part in a money market fund for brokerage convenience.

Example 3: High earner comparing taxable vs. muni cash

You’re in a higher bracket and keep a large cash balance in a taxable account. A municipal money market fund might
provide a better after-tax yield than a taxable government fundeven if its quoted yield looks lower. Tax-equivalent
yield helps you compare fairly.

Common mistakes to avoid

• Mistaking “money market fund” for “money market account”: One is an investment; one is a bank deposit.
• Chasing yield without checking type: A slightly higher yield may come with different holdings and risks.
• Ignoring expenses: Fees are small, but on cash tools they matter because returns are smaller.
• Forgetting taxes: After-tax yield is the only yield your budget actually experiences.
• Using MMFs for long-term growth goals: They’re for liquidity and stability, not beating inflation long term.

FAQ: quick answers you can repeat at dinner parties

Can you lose money in a money market fund?

Yes. It’s designed to minimize that risk, but it’s still an investment and losses are possible in unusual conditions.

Are money market funds guaranteed?

No. They are not FDIC-insured and not guaranteed by the government.

How fast can you get your money out?

Often same-day or next-day in many brokerages, but timing depends on the platform and the fund’s rules.

Do money market funds pay interest?

They pay dividends that generally reflect short-term interest rates. Functionally it feels like interest, but it’s
distributed as dividends.

Is a money market fund good for an emergency fund?

It can be, depending on your priorities. If deposit insurance is non-negotiable, a bank account may be a better fit.
If you value brokerage convenience and competitive yield, a conservative money market fund may be worth considering.

Conclusion

Money market funds sit in that sweet spot between “cash that does nothing” and “investments that can get dramatic.”
They’re built for liquidity, stability, and income that tends to follow short-term rates. The key is remembering what
they are: mutual fund investmentsuseful, typically low-volatility, but not FDIC-insured and not risk-free.

Choose a fund type that matches your goal (government, prime, or municipal), compare yield after expenses and
taxes, and prioritize access and safety features that match your real-life needs. If your money needs to be available
soon, money market funds can be a smart “waiting room” for your dollarscomfortable, calm, and with fewer jump scares
than most of the market.

Real-world experiences related to money market funds

Below are common, realistic scenarios people report when using money market funds. Consider these “field notes”
from everyday cash managementno heroics, no crypto dragons, just humans trying to keep their money from taking a nap
in a checking account.

Experience 1: The “I’m just waiting” investor

A lot of people first discover money market funds while they’re waiting to invest. Maybe they sold a stock, rolled
over a retirement account, or received a bonus. They don’t want to rush into the market tomorrow, but they also don’t
want the cash to sit idle. A money market fund becomes a psychological bridge: “My money is doing something while I
decide what’s next.” This can reduce impulsive investing decisions because the cash is earning a yield and feels
“handled,” not abandoned.

Experience 2: The emergency-fund compromise

People often wrestle with the emergency fund question: should it be in a bank (insured) or in a brokerage cash
vehicle (often higher yield and more convenient for investing)? A common compromise is a two-bucket approach:
one bucket in an FDIC-insured high-yield savings account for true emergencies, and another bucket in a government
money market fund for “near emergencies” or planned near-term expenses. The experience here is mostly about behavior:
separating buckets helps people avoid raiding the emergency fund for “non-emergencies,” like a weekend trip that
somehow becomes a personality.

Experience 3: The tax-season “parking lot”

Many freelancers and small business owners use money market funds as a tax holding pen. Every time they get paid,
they move a percentage into a money market fund rather than leaving it in checking. The advantage is emotional and
practical: it’s still liquid, but it’s mentally labeled “not mine.” The yield won’t transform your tax bill into a
spa day, but it can soften the sting. People also like that the funds can be accessed when quarterly estimated taxes
are due, without needing to break a CD or sell volatile investments at a bad time.

Experience 4: The yield-chaser learns about “type”

One of the most common “aha” moments happens when someone chases the highest quoted yield and later realizes they
bought a different category than they intended. For example, they thought they were buying a government money market
fund but ended up in a prime fund, or they didn’t consider that a municipal money market fund’s yield should be
compared on a tax-equivalent basis. The learning experience is usually positive (and mildly embarrassing in a
character-building way): people start checking whether a fund is government, prime, or municipal before comparing
yields. Once they do that, they usually make more confident decisions and stop switching funds every time a yield
changes by 0.07% (which is not a personality trait anyone needs).

Experience 5: When rates fall, expectations reset

Money market fund fans are often happiest when short-term interest rates are higher. When rates drop, yields drift
down too, and people feel personally betrayedlike the fund manager “took away” the yield. In reality, money market
yields are doing what they’re designed to do: track short-term rates. The best outcome of this experience is better
planning. People learn to treat money market funds as a cash tool, not a long-term return engine. When rates
fall, they revisit whether extra cash should stay liquid (MMF) or be allocated toward longer-term goals (bonds,
diversified investments, or other strategies aligned with their timeline).

The big takeaway from these real-world patterns is simple: money market funds shine when you use them for what they
areefficient, relatively conservative cash management instrumentsrather than expecting them to do the job of a
growth portfolio, a guaranteed bank account, and a financial therapist all at once.