Money Market Funds

Money market funds represent a solid investment for those who need to minimize their risk while still managing a profit. They are comprised of short-term debt securities including unsecured fixed-maturity promissory notes, sale and repurchase agreements, and short-term bonds. Money market funds are governed by the provisions of the Investment Company Act of 1940; these regulations restrict the types and durations of investment securities that can be incorporated into money market funds. The Reserve Primary Fund was the first money market fund and was established in 1971.

Money market funds are designed not to lose money, rather than to turn substantial profits; in nearly all cases, these funds achieve this primary goal. Only two funds have failed to maintain a net asset value since 1971; one of these, however, was the first ever created. The Reserve Primary Fund failed in September 2008 when it fell below $1 per dollar share; the only previous instance occurred in 1994 when the Community Bankers U.S. Government Fund “broke the buck” by falling to a value of 96 cents per dollar share. In recent years, over 200 American and European money market funds were given government bailout funds; without these cash infusions, it is likely that at least some of these funds would have failed to maintain their net asset value and would have failed as a result.

Requirements for money market funds

SEC regulations set forth specific requirements for money market funds in order to limit the risks inherent in these investments. Money market funds must meet these requirements:
  • No more than 5% of the fund can be invested in any issuer other than the Federal government or certain repurchase agreements
  • The weighted average maturity of all investments in the fund must be 90 days or less
  • Generally, the fund should purchase the lowest risk, highest-rated debt securities with durations of thirteen months or less

Advantages of money market funds

For debt security issuers, money market funds provide a solid source of funds and a reliable market in which to obtain the cash needed to maintain liquidity. Money market funds are a low-risk vehicle for investors; while profits are rarely significant, they are usually consistent and dependable except under extreme market conditions.

Money market funds vs. money market accounts

Money market funds are often confused with money market accounts; significant differences exist between the two, however. A money market account is a specialized savings account available from banks and is insured by the Federal Deposit Insurance Corporation, while money market funds are investment securities and are subject to the normal risks associated with stock market speculation. A money market account typically requires a minimum deposit, but offers higher interest rates usually tied to currently prevailing interest rates. Money market funds offer superior protection for investors along with moderate profit potential, while money market accounts offer lower earnings but are risk-free in nearly all cases.
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Tim Ord
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