Money Market Funds
A money market fund is a low risk fund that is often used as the “cash” inside an investment account. It aims to keep its value stable while paying interest.
What Is a Money Market Fund?
A money market fund invests in very short term, high quality IOUs, such as US Treasury bills and other short term loans. Because the loans are short and high quality, the fund is designed to be very stable.
Important:
A money market fund is not a bank account. A money market account is a bank product.
How It Works in Real Life
Many brokerages automatically park unused money in a money market fund. This is sometimes called a cash sweep. It can earn interest while you decide what to buy next.
The rate is not locked. When overall interest rates change, the money market fund yield can change, too. That is normal.
How Safe Are Money Market Funds?
Money market funds are considered low risk, but they are not the same as a bank deposit. They are designed to stay stable, yet they are still investments.
Key safety idea:
Bank accounts are typically insured against bank failure. Money market funds are designed to be stable, but they are not bank insured.
What to Look For
A fund that holds mostly US government debt is typically the simplest and lowest risk type
Expense ratio: lower costs generally means you keep more of the interest
How quickly cash is available if you sell and transfer out
Where the fund shows up in your account, sometimes listed as your cash position
What to Watch Out For
Do not confuse it with a bank account
If you need guaranteed bank insurance for emergency cash, use a checking or savings account. Money market funds are usually for holding cash inside an investment account.
Teen friendly rule:
Use money market funds for money you might invest soon, not for money you need tomorrow.
Key Takeaway
Money market funds are a low risk place to hold cash inside a brokerage account while earning interest. They are great as a waiting room for money, but they are not the same as a bank savings account.