Money Market Fund Overview and Investment Options

Money market funds are a type of investment that offers a safe and liquid place to park your money.

They're designed to provide a low-risk way to earn returns on your cash, with the goal of preserving capital while still generating some income.

Money market funds invest in low-risk, short-term debt securities such as commercial paper and treasury bills.

These investments typically have maturities of less than a year, which means you can get your money back quickly if you need it.

Money market funds often have a minimum investment requirement, which can range from a few hundred to several thousand dollars.

Some money market funds may also have fees associated with them, such as management fees or administrative fees.

However, many money market funds are no-load, meaning you don't have to pay a sales charge to invest.

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Money market funds are classified into various types depending on the class of invested assets, the maturity period, and other attributes. They can be categorized based on the type of investment strategy and the distribution channel or investor.

In the United States, money funds are generally categorized into Prime, Treasury or Tax-exempt, Institutional or Retail. Prime money funds invest in floating-rate debt and commercial paper of non-Treasury assets, while Treasury or Tax-exempt funds invest in US government securities.

Here's a breakdown of the main types of money market funds:

Municipal money funds, also known as tax-exempt money funds, invest in short-term municipal securities issued by states, local governments, and other municipal agencies.

These funds can offer competitive yields, as evidenced by the 7-day yields of various Schwab municipal money funds, which range from 2.41% to 2.90% (with waivers) as of January 3, 2025.

The minimum initial investment for some of these funds is $0, making them accessible to a wider range of investors.

Some Schwab municipal money funds, such as the Schwab Municipal Money Fund - Investor Shares (SWTXX), have a minimum initial investment of $0 and offer a 7-day yield of 2.75% (with waivers) as of January 3, 2025.

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Other funds, like the Schwab New York Municipal Money Fund – Ultra Shares (SNYXX), have a minimum initial investment of $1,000,000 and offer a 7-day yield of 2.87% (with waivers) as of January 3, 2025.

Here are some examples of Schwab municipal money funds, including their 7-day yields and minimum initial investments:

Institutional money funds are marketed to corporations, governments, or fiduciaries.

They are often set up so that money is swept to them overnight from a company's main operating accounts.

Large national chains often have many accounts with banks all across the country.

But they electronically pull a majority of funds on deposit with them to a concentrated money market fund.

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Investing in money market funds can be a great option for those looking for a low-risk investment with a fixed price of $1 per share. This means your account value won't fluctuate much, unless you earn interest.

Money market funds typically invest in low-risk assets like Treasury bonds, CDs, or short-term corporate bonds with maturities of less than a year. They aim to maintain their Net Asset Value (NAV), so your account value shouldn't change much.

To compare different money market funds, look at the 7-day yield, which is used to measure a fund's annualized yield. This gives you an idea of the return you can expect over the next year, based on the average payouts made in a week.

A $10,000 investment in a money market fund with a 5% SEC yield would earn $500 on an annual basis. This is calculated by multiplying the investment amount by the yield.

Money market funds may invest in a variety of debt-based financial instruments, including bank CDs, commercial paper, and U.S. Treasuries. The returns from these instruments are dependent on the applicable market interest rates.

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NAV Standard is a key feature of money market funds that sets them apart from other investment options. A money market fund aims to maintain a net asset value (NAV) of $1 per share.

This means that your account value shouldn't change other than any growth from your earnings. Any excess earnings generated through interest on the portfolio holdings are distributed to the investors as dividend payments.

Investors can purchase or redeem shares of money market funds through investment fund companies, brokerage firms, and banks. The NAV standard is a requirement that forces fund managers to make regular payments to investors, providing a regular flow of income.

Here's a breakdown of the types of debt-based financial instruments that money market funds may invest in:

These investments are dependent on the applicable market interest rates, which means the overall returns from the money market funds are also dependent on interest rates.

The earnings from money market funds can come from interest income or capital gains, so they're taxed the same way as other investment income.

You'll need to pay taxes on the earnings from your money market fund, just like you would with other investments.

Investing in a money market fund doesn't provide any tax benefits, so you'll need to consider the tax implications when deciding whether to invest.

Money market funds are taxed as ordinary income, which means you'll pay tax on the earnings at your regular income tax rate.

The tax implications of investing in a money market fund are relatively straightforward, but it's still a good idea to consult with a tax professional to make sure you're in compliance with all tax laws.

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The SEC defines the necessary guidelines for money market funds in the U.S., including the characteristics, maturity, and variety of allowable investments. Money market funds mainly invest in top-rated debt instruments with a maturity period under 13 months.

The SEC requires a money market fund portfolio to maintain a weighted average maturity (WAM) period of 60 days or less. This ensures that only highly liquid instruments qualify for investments.

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In the U.S., money market funds are not allowed to invest more than 5% in any one issuer, except for government-issued securities and repurchase agreements. Historically, money market funds held only government bonds, but the transition to commercial paper resulted in higher yields and risks.

Money market funds were designed and launched in the early 1970s in the United States, gaining rapid popularity due to their easy way to purchase a pool of securities offering better returns than standard interest-bearing bank accounts.

The SEC introduced reforms in 2010, and implemented fundamental structural changes to the way they regulate money market funds in 2016. These changes required prime institutional money market funds to float their NAV and no longer maintain a stable price.

In Europe, the EU completed drafting of a similar regulation for money market funds in 2017, introducing new rules for MMFs domiciled, managed or marketed in the European Union.

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Government and Treasury money funds are designed to provide a low-risk investment option for investors. They invest in short-term U.S. government debt securities, such as Treasury bills, bonds, and notes.

A key characteristic of government money funds is that they must invest at least 99.5% of their total assets in cash, government securities, and repurchase agreements that are fully collateralized by cash or government securities. This ensures that the fund's assets are highly liquid and minimize risk.

Schwab offers several government and Treasury money funds, including the Schwab Government Money Fund and the Schwab Treasury Obligations Money Fund. These funds have varying minimum initial investment requirements, ranging from $0 to $1,000,000.

Here are some key features of Schwab's government and Treasury money funds:

These funds are designed for retail and institutional investors, and can be purchased through the Schwab website.

Money market funds aren't FDIC-insured, but they're still considered safe investments.

The price of a money market fund share has dropped below $1 only twice in history, before additional regulations were put into place in 2016 to make them even safer.

Government funds can be considered the safest type of money market fund, with at least 99.5% of their assets backed by the full faith and credit of the U.S. government.

SIPC coverage, which protects you if your broker fails, may insure investments held in brokerage accounts, including money market funds.

In the U.S., money market funds are regulated by the SEC, which defines the guidelines for their characteristics, maturity, and investments. The SEC requires money market funds to invest in top-rated debt instruments with a maturity period under 13 months.

A key requirement is the weighted average maturity (WAM) period, which must be 60 days or less. This ensures that the fund's portfolio is highly liquid and investors' money is not locked into long-maturity instruments.

Money market funds are not allowed to invest more than 5% in any one issuer, except for government-issued securities and repurchase agreements.

The EU has its own regulation for money market funds, introduced in 2017 and effective in 2019. The regulation categorizes money market funds into four types: Public Debt CNAV, Low Volatility NAV, Short Term Variable NAV, and Standard Variable NAV.

Here's a breakdown of the four EU money market fund categories:

The SEC's 2014 rule amendments aimed to address money funds' susceptibility to heavy redemptions in times of stress. The amendments required institutional non-government money funds to have a floating NAV and introduced a liquidity fee and redemption suspension mechanism.

Money market funds have a rich history that dates back to the early 1970s in the United States.

The first money market fund, Reserve Fund, was established in 1971 by Bruce R. Bent and Henry B. R. Brown, offering investors a way to preserve their cash and earn a small rate of return.

Money market funds quickly gained popularity as they provided better returns than standard interest-bearing bank accounts, which was a major limitation at the time due to Regulation Q.

Regulation Q prohibited demand deposit accounts from paying interest and capped the rate of interest on other types of bank accounts at 5.25%, making money market funds a viable alternative.

The Reserve Fund was the first of many money market funds, which grew significantly in the years following its launch and helped popularize mutual funds in general.

In the 1990s, Japanese investors turned to money market funds to find higher yields in a low-interest-rate environment, but several funds fell short of their stable value in 2001 due to the Enron bankruptcy.

Historically, money market funds held only government bonds, but the transition to commercial paper led to higher yields, although it also introduced new risks.

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Breaking the Buck is a rare occurrence in money market funds, but it can happen. The Community Bankers U.S. Government Money Market Fund was the first to experience this in 1994, with a liquidation at $0.96 per share due to heavy investment in derivatives.

The Reserve Primary Fund broke the buck in 2008, falling to $0.97 per share after holding Lehman Brothers debt obligations and facing panicked redemptions.

To prevent this from happening again, the SEC introduced new rules in 2010 to provide more stability and resilience in money market funds. These rules placed tighter restrictions on portfolio holdings and introduced provisions for imposing liquidity fees and suspending redemptions.

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September 2008 was a pivotal month for money market funds.

Money market funds increasingly became important to the wholesale money market leading up to the crisis.

Their purchases of asset-backed securities put the funds in a pivotal position in the marketplace.

Large-scale funding of foreign banks' short-term US-denominated debt also contributed to their importance.

The week of September 15–19, 2008, was very turbulent for money funds and a key part of financial markets seizing up.

Money market funds are designed to be safe, liquid, and higher-yielding than traditional bank savings accounts. They're intended to not lose value, making them a relatively secure investment option.

One key difference between money market funds and traditional bank accounts is insurance coverage. While bank accounts are FDIC-insured up to $250,000, money market funds aren't insured by the FDIC, but may be eligible for $500,000 coverage under SIPC when held in a brokerage account.

When you sell money market fund shares, the trade is processed at the close of business, and the money takes 2 business days to transfer to your bank account. This means you'll need to allow time for money movement, so plan accordingly.

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Money market funds have their advantages and disadvantages. Here are some key points to consider.

Money market funds are designed to be safe, liquid, and higher-yielding than traditional bank savings accounts. This makes them an attractive option for those looking for a low-risk investment.

One of the main benefits of money market funds is their liquidity. You can withdraw your cash at any time without incurring penalties. This is a huge advantage over traditional bank savings accounts, which may come with fees for early withdrawal.

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Insurance coverage is another important consideration. Traditional bank savings accounts and CDs are FDIC-insured up to $250,000. Money market funds, on the other hand, may be eligible for $500,000 coverage under SIPC when held in a brokerage account.

Here's a comparison of the key benefits of money market funds:

Money market fund sales are processed like sales of other mutual funds, taking 2 business days to transfer to your bank account. This means you'll need to plan ahead and allow time for the money movement.

Savings accounts often come with features like overdraft protection, which can be a lifesaver in unexpected financial situations.

Money market funds generally have higher yields than bank savings accounts, making them a more lucrative option for those looking to earn interest on their money.

Savings accounts are typically a low-risk option, as they're insured by the bank, but the returns may not be as high as other investment options.

Money market funds can offer higher yields, but they may also come with some level of risk, so it's essential to understand the terms and conditions before investing.

Vanguard money market funds outperformed their peer-group averages over every time period. This impressive track record includes the quarter-end, year-to-date, 1-year, 3-year, 5-year, and 10-year periods ended September 30, 2024.

A total of 218 out of 249 Vanguard funds outperformed their Lipper peer-group averages. This is a remarkable achievement that highlights the company's commitment to delivering strong investment performance.

Six out of six Vanguard money market funds outperformed their peer-group averages. This is a testament to the company's expertise in managing short-term investments.

Seventy out of 83 Vanguard bond funds also outperformed their peer-group averages. This demonstrates the company's ability to navigate even the most challenging market conditions.

Twenty-one out of 23 Vanguard balanced funds outperformed their peer-group averages. This is a significant achievement that highlights the company's skill in balancing different asset classes.

One hundred and twenty-one out of 137 Vanguard stock funds outperformed their peer-group averages. This is a remarkable achievement that underscores the company's expertise in managing equity investments.

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Money market funds are relatively safe investments, thanks to the Securities Investor Protection Corporation that protects them in the U.S.

However, it's essential to note that they are not insured by the Federal Deposit Insurance Corporation (FDIC), which means they don't offer the same level of protection as bank accounts.

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Money market funds have recently undergone some significant changes, and it's essential to understand how these updates will affect you.

Recently instituted money market requirements will do away with gates, which means you won't have to worry about being locked out of your funds due to liquidity issues.

The rules aren't yet in effect, but they will become effective 60 days after publication in the Federal Register. This gives funds a tiered transition period to comply with the amendments.

For more information, see the SEC press release regarding money market fund reforms and amendments.

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Money market funds are considered relatively safe investments.

They are protected by the Securities Investor Protection Corporation in the U.S.

However, they are not insured by the Federal Deposit Insurance Corporation (FDIC).

This means that your money is not as safe as it would be in a bank account, which is FDIC-insured.

But overall, money market funds are a low-risk option for those looking to keep their money liquid and earn a small return.

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Liquidity fees and gates are tools to help money market fund managers keep the funds stable during times of extreme market duress. They're like emergency brakes to prevent a fund from freezing up and becoming inaccessible to investors.

A fund may impose a fee of up to 2% on redemptions if its weekly liquid assets fall below 30% of its total assets. This is a way to discourage investors from withdrawing their money when the fund is in a tight spot.

A fund must impose a 1% fee on redemptions (with the option of imposing a fee of up to 2%) if its weekly liquid assets fall below 10% of its total assets—unless the fund's board determines a fee wouldn't be in the fund's best interest. This rule helps ensure that the fund has enough cash on hand to meet its obligations.

A fund may impose a gate—that is, suspend redemptions—for up to 10 business days in a 90-day period. This means that investors won't be able to withdraw their money for a short period of time.

The fees and gates rules only apply to retail and institutional funds, although government funds may voluntarily adopt them if the fees and gates are previously disclosed to investors.

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