Understanding Types of Money Market Funds and Their Features

Money market funds are a type of investment vehicle that pools money from many investors to invest in low-risk, short-term debt securities.

They're a popular choice for investors seeking liquidity and low volatility, as they typically offer competitive yields and daily liquidity.

Money market funds can be broadly categorized into taxable and tax-exempt funds.

Taxable money market funds invest in a wide range of securities, including commercial paper, treasury bills, and certificates of deposit.

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Money market funds are a type of investment that can be a sound alternative to traditional bank accounts or CDs. They generally combine competitive yields, easy access to your money, and low risk. Money market funds are typically used to hold money you'll need soon or as part of an emergency fund.

Money market funds invest in low-risk assets like Treasury bonds, CDs, or short-term corporate bonds with maturities of less than a year. They have a fixed price of $1 per share and aim to maintain their Net asset value (NAV). This means your account value shouldn't change other than any growth from your earnings.

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The NAV is the price per share at which you buy or sell a money market mutual fund. It's calculated at the end of the trading day and money market funds try to maintain a stable $1.00 per share. Vanguard's money market funds offered to clients may keep their NAV at a stable $1.00, subject to SEC requirements.

Money market funds pay distributions monthly and their yields vary. To see what a money market fund is currently paying, look at the 7-day yield. This calculation is used to measure a fund’s annualized yield and gives you an idea of the return you can expect over the next year.

Here are some key liquidity requirements for money market funds:

Money market funds are required to maintain sufficient liquidity to meet reasonably foreseeable redemptions. This means they must consider factors that could affect the strategy’s liquidity needs, including market opportunities and shareholder flows.

Money market funds offer a range of benefits and features that make them an attractive option for investors.

One of the key benefits is liquidity, with many funds allowing you to redeem your shares on short notice, typically within a few days.

They also provide a low-risk investment opportunity, with most money market funds investing in high-quality, short-term debt securities.

This means you can earn interest on your money without exposing yourself to significant market volatility.

Some money market funds are also designed to be tax-efficient, with strategies in place to minimize capital gains distributions.

This can be a big advantage for investors who are sensitive to taxes or are looking to minimize their tax liability.

Money market funds can be used as a cash alternative, allowing you to earn interest on your money instead of leaving it in a traditional checking or savings account.

This can be a great option for people who have excess cash and want to earn a higher return on their money.

In addition, some money market funds offer check-writing and debit card privileges, making it easy to access your money when you need it.

Money market funds come in different flavors, each with its own unique characteristics.

There are two main types of money market funds: taxable and tax-free. Taxable money market funds, as the name suggests, are subject to taxes on their earnings.

Tax-free money market funds, on the other hand, are typically offered by banks and credit unions, and are designed to help you grow your savings over time.

A fund is essentially a collection of money or assets that are pooled together to invest in a variety of low-risk, short-term debt securities.

Money market funds, for instance, invest in Treasury bills, municipal debt, or corporate bonds, offering a safe, stable investment option for short-term goals or emergency funds.

They're designed to provide a safe place to park your money while still earning modest returns.

Money market funds are different from money market accounts, which are typically offered by banks and credit unions and are insured by the FDIC.

This means that money market funds are an investment product, requiring a brokerage account to get started.

They can be a valuable tool for diversifying your portfolio, allowing you to earn interest on your savings while helping reduce market risk.

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Money market accounts are bank accounts that invest in assets like those in money market funds, with varying insurance coverage and fees.

They have different fees, withdrawal restrictions, yields, minimums, and features compared to traditional bank savings accounts.

The interest on money market accounts is calculated using the 7-day SEC yield formula, which allows for comparison across many money market products.

This yield includes distributions paid by the fund plus any appreciation over a 7-day period, minus average fees incurred during 7 days.

Money market accounts are not protected against price changes due to changing interest rates, unlike U.S. Treasury or government agency securities, which provide substantial protection against credit risk.

U.S. Treasury bills are guaranteed as to the timely payment of principal and interest, but their income is not necessarily exempt from taxes.

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Money market funds are a type of mutual fund that invests in low-risk, short-term debt securities, such as Treasury bills, municipal debt, or corporate bonds. They're designed to offer a safe, stable investment option for money you may need to access in the short term, like an emergency fund or a short-term goal.

Money market funds are different from money market accounts in a few important respects. While both offer low-risk ways to save money and earn modest returns, money market accounts are typically offered by banks and credit unions, and as deposit accounts, they're insured by the FDIC, the federal agency that insures bank deposits in the U.S.

Money market funds are an investment product, so you need a brokerage account to get started. They can be a valuable tool for diversifying your portfolio, allowing you to earn interest on your savings while helping reduce market risk.

A money market fund (MMF) is a type of mutual fund that invests in short-term debt, primarily money market securities. Like other types of mutual funds, MMFs create a portfolio of securities and sell shares to investors who can potentially earn returns in the form of income and capital gains.

Money market funds can provide daily liquidity, but they can offer the current market rate of interest – while savings accounts are subject to the given bank’s offered interest rate. Additionally, money market funds can offer the potential for greater investment diversification since the money is pooled to buy securities.

Here's a comparison of money market funds and bank deposits:Bank deposit Money market fundCounterparty diversificationExposure to a single bank counterparty.Investment in multiple counterparties resulting in diversification.LiquidityPotential penalties for accessing cash prior to maturity of term deposit.Most MMFs offer same or next-day liquidity with no lock up period.Operational easeMultiple bi-lateral agreements with banks typically required to achieve laddered and diversified investment. Multiple individual instructions may be required to execute.Single transaction which can be executed in various ways. Instructions needed for subsequent redemptions and subscriptions.YieldRates driven by bank funding needs, which can be volatile.Active management of diversified money market securities allows for nimble positioning in changing market conditions. A MMF is not a guaranteed investment. Investment in MMFs can fluctuate and investors’ capital is at risk.FeesAgreed between client and bank (often costs to break term agreements).Costs and fees embedded in product so yields are received net. Liquidity fees and redemption gates remain mechanisms that may be incorporated in times of uncertainty.

Note that this table is not exhaustive, and a money market fund is not a guaranteed investment vehicle.

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Government money market funds are the safest and most liquid type, investing only in assets backed by the federal government, such as Treasury bonds.

Retail funds, on the other hand, have rules about liquidity fees and gates during times of extreme market stress, which can mean you'd have to pay a fee or could be temporarily unable to withdraw money.

Government funds are allowed to follow these rules but aren't required to, giving them more flexibility.

Vanguard's money market funds have a $3,000 minimum initial investment.

You can invest as little as $3,000 to get started with most Vanguard money market funds.

The Vanguard Federal Money Market Fund is an exception, with no minimum initial investment amount.

This means you can choose this fund if you're just starting out or have a smaller amount to invest.

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A repurchase agreement, also known as "repo", is a financial transaction where a money market fund provides cash to a counterparty and receives U.S. government securities as collateral.

The counterparty agrees to buy back the collateral at a specified time and price, implying a rate of interest for the money market fund.

In a repo, the money market fund essentially lends money to the counterparty, which is then used to buy securities, and in return, the fund receives the securities as collateral.

The counterparty, usually a central bank like the New York Fed, agrees to repurchase the securities at a later date, usually with interest.

This type of agreement is commonly used by money market funds to invest in short-term government securities, earning a small rate of interest.

The repurchase agreement is essentially a collateralized loan, where the borrower (counterparty) agrees to return the loan plus interest at a specified time.

Vanguard's money market funds have expense ratios ranging from 0.09% to 0.16% per year.

These costs are built-in and cover the fund's operational expenses. The average expense ratio is lower than the industry average.

Each $10,000 invested incurs a cost of $9 to $16 per year, depending on the fund's expense ratio.

Vanguard's average expense ratio for money market funds is 54% less than the industry average.

Note that these figures don't represent the return on any particular investment, and the rate of return is not guaranteed.

Vanguard offers both taxable government and municipal money market funds with a stable $1 NAV.

You can invest in a Vanguard money market fund without opening a new account if you're already a client.