Money Market Fund

A money market fund is a mutual fund holding short-term debt that behaves like cash with a competitive yield and next-day liquidity. It is not a bank deposit: the SEC regulates it, the FDIC does not insure it, and 2024's reforms changed how it handles stress.

US Retirement AccountsLast reviewed 2026-10-05

What it is

A money market fund is a mutual fund investing in short-term, high-quality debt: Treasury bills, commercial paper, and certificates of deposit. It targets a stable $1.00 share price and pays a competitive yield tracking the federal funds rate closely. It is the default parking spot for brokerage cash, with next-business-day liquidity in practice. It is not FDIC-insured; the SEC regulates money market funds under Rule 2a-7. The 2016 reforms let institutional prime funds impose redemption gates and fees in stress, and the 2024 reforms replaced those gates with swing pricing for institutional funds.

The distinction that matters: a money market fund is a fund, with a tiny but real dispersion risk, while a money market deposit account is a bank product insured to $250,000. The names are nearly identical; the insurance is not. Government funds hold Treasuries and agency paper; prime funds hold corporate paper and pay a few basis points more for it.

Key takeaways

A money market fund holds short-term debt and targets a stable $1.00 share price.
The yield tracks the federal funds rate closely; next-business-day liquidity in practice.
It is SEC-regulated, not FDIC-insured; the money market deposit account is the insured twin.
Government funds hold Treasuries; prime funds hold corporate paper for a few basis points more.
The 2024 reforms replaced institutional redemption gates with swing pricing.

How it works

The fund buys short-term instruments, all maturing within 397 days under the SEC's Rule 2a-7, with the portfolio's weighted average maturity capped at 60 days. Interest accrues daily and the fund publishes a 7-day SEC yield, the standardized number to compare across funds. The $1.00 share price is maintained by amortized cost accounting, which is why the balance never visibly moves even as rates change. The yield does the moving.

Government funds hold Treasuries and agency paper, roughly 80% of assets by rule. Prime funds hold corporate commercial paper and CDs, historically paying a few basis points more; municipal funds hold tax-exempt paper for high-bracket investors. The 2016 reforms split retail from institutional funds and let institutional prime and municipal funds impose liquidity fees and redemption gates in stress. The 2024 reforms removed the gates for those institutional funds in favor of swing pricing, which adjusts the exit price to the cost of the trade rather than blocking the door. In practice, the placement matters most: sweep programs move idle brokerage cash into these funds automatically, often at a rate the broker keeps part of.

Why it matters

The money market fund is where most brokerage cash sits, which makes it the most-owned fund nobody chose deliberately. The distinction from the bank twin matters most in stress: the FDIC insures the deposit account to $250,000, while the SEC regulates the fund with rules written for exactly the scenario where the $1.00 price is tested. The 2008 Reserve Primary Fund break-the-buckle is the case study: a $0.03 loss on the $1.00 price froze the commercial paper market and forced a temporary Treasury guarantee program.

I watched a colleague named Brent (yes, that Brent) leave $60,000 in a default brokerage sweep option paying 0.35% while the same platform's government money market fund paid 4.4%. The gap was roughly $2,400 a year for clicking a different button.

The highest-leverage thing most Americans can do is check what the sweep option actually pays, buy the fund directly when it pays more, and treat the fund as cash-like but not cash. Compare yields with the effective yield calculator or model the cash drag with the savings interest calculator.

Real-world examples

The sweep account versus the fund: $60,000 for a click

A default sweep at 0.35% pays $210 a year on $60,000; the same brokerage's government money market fund at 4.4% pays roughly $2,640. The difference is roughly $2,400 a year, recurring, for buying the fund instead of accepting the default. The sweep exists because the broker keeps the spread, which is a business model, not a feature. The sweep is the most profitable product on the platform, and it wins because nobody clicks. Clicking the button is the only decision the cash menu requires.

Government versus prime: the basis-point trade

A government fund at 4.35% versus a prime fund at 4.45%: on $250,000, the spread is $250 a year for holding commercial paper instead of Treasuries. In stress, prime funds are the ones the 2016 rules gated and the 2024 reforms moved to swing pricing; government funds were never gated. The 10 basis points price the scenario risk. The extra yield is the fee for holding paper that can freeze, priced in basis points.

The 2008 break-the-buckle, revisited

The Reserve Primary Fund held Lehman Brothers paper, broke the $1.00 price to $0.97 in September 2008, and watched redemptions freeze; institutional investors lost 3% and waited weeks for the remainder. The Treasury's temporary guarantee and the reform sequence of 2010, 2016, and 2024 all trace to that week. The $1.00 price is a convention, not a guarantee. Every reform since traces to that week, and the retail funds were never the ones that broke.

Common mistakes

Mistake: Assuming the fund is FDIC-insured like a bank account.

Why it bites you: It is an SEC-regulated fund; the deposit account twin is the insured product. The names differ by one word and the insurance differs entirely.

Mistake: Leaving the brokerage sweep as the default.

Why it bites you: Sweep rates run below the fund's yield by design; on $60,000, the gap between 0.35% and 4.4% is roughly $2,400 a year, paid to the broker.

Mistake: Comparing funds on teaser dividend rates instead of the 7-day SEC yield.

Why it bites you: The 7-day SEC yield is the standardized, comparable number, and bonus programs are marketing. Compare 7-day yields across funds and ignore the rest.

Mistake: Assuming the $1.00 price is guaranteed.

Why it bites you: It is a maintained convention, not a promise: the 2008 break-the-buckle cost holders 3% and weeks of waiting. Government funds carry the least scenario risk.

Ivy's take

I spent an afternoon inside two brokerage cash menus with a spreadsheet open so you don't have to, and the finding is that the sweep option is the most profitable product on the platform: it holds your money, pays you a fraction of the yield, and keeps the spread as margin. The fund next to it holds the same Treasuries and pays the full rate. The difference is a click, and the broker is betting you will not make it.

I treat money market funds as cash-like but not cash: next-day liquidity, a fed-funds-linked yield, and a rules framework rewritten three times since 2008, which is the tell. The $1.00 price is a convention maintained by amortized accounting, and conventions can break. Brent has never clicked the button; I have never left the default. The spread between us is roughly $2,400 a year.

Related jargon, defined

7-day SEC yield: The standardized annualized yield from the last seven days of income, net of fees.
Sweep account: The brokerage's automatic cash program, often at a rate below the fund's yield.
Rule 2a-7: The SEC rule governing money market funds: short maturities, high quality, stable price.
Swing pricing: Adjusting the exit price to the cost of the trade, replacing redemption gates.
Break the buck: When the $1.00 share price falls below par, as in 2008.
Money market deposit account: The bank-insured twin, FDIC-covered to $250,000.

Frequently asked questions

Is a money market fund FDIC-insured?+

No: it is an SEC-regulated mutual fund. The FDIC insures the bank twin, the money market deposit account, to $250,000. The fund's safety comes from Rule 2a-7's short, high-quality mandate.

What is the 7-day SEC yield?+

The standardized annualized yield based on the last seven days of income, net of fees. It is the only number to compare across funds; teaser rates and bonuses are marketing.

Can a money market fund lose money?+

Technically yes: the $1.00 price is maintained, not guaranteed, and the 2008 Reserve Primary Fund break-the-buckle cost holders 3%. Government funds carry the least risk of it recurring.

Money market fund or high-yield savings account?+

Nearly identical yields at the same fed funds rate, but the HYSA is FDIC-insured and same-day while the fund is next-day and uninsured. Inside a brokerage, the fund is the cash-equivalent choice; outside, the HYSA.

What changed with the 2024 reforms?+

Institutional prime and municipal funds lost the redemption gates and liquidity fees from 2016, replaced by swing pricing that adjusts the exit price to trading costs. Retail funds were untouched, and the $1.00 price still holds.

Disclaimer: This information is general in nature and does not constitute financial or legal advice. Always consult a qualified professional for your specific situation.

Keep learning

Certificate of Deposit FDIC Insurance High-Yield Savings Account Liquidity Federal Funds Rate

Money Market Fund