What Is a Money Market Fund?

A money market fund is a type of mutual fund that invests in low-risk, short-term debt securities, usually with maturities of less than one year.

They frequently hold Treasury bills, municipal bonds and investment-grade corporate bonds, as well as cash (certificates of deposit, or CDs, for example). While they share some features with other mutual funds, they are characterized by their low-risk nature and unique pricing.

“I like to think of a money market fund as a safe place to park cash you’re not quite ready to spend yet, but don’t want sitting idle in the bank either,” says Mark Henry, the founder and CEO of Alloy Wealth Management. 

“The purpose of a money market fund isn’t to build wealth or grow your money quickly,” Henry continues. “It’s to keep it safe and easily accessible while earning more than it would in a traditional checking or savings account. This can be a great option for investing your emergency fund or money you’re saving up for a big purchase, like a down payment on a house.”

While money market funds aren’t insured like bank deposit accounts are, they’re generally considered to be low-risk investments, especially government funds, where the underlying assets are backed by the full faith and credit of the U.S. government. 

The federal government guarantees repayment on its debts, making these assets the closest thing to a risk-free investment. However, along with that security comes a historically lower return than many other investments.

Types of money market funds

The three types of money market funds are government, municipal (also known as tax-exempt) and prime.

• Government funds: Government money market funds invest in debt securities issued by the U.S. government. The most common example is Treasury securities, but they can also include securities issued by other government agencies or government-sponsored agencies (for example, Fannie Mae or Freddie Mac).
• Municipal funds: Municipal money market funds invest in municipal (i.e., state and local government) bonds. Unlike other types of money market funds, municipal funds are exempt from federal (and sometimes state) income tax.
• Prime funds: Also known as retail funds, prime money market funds can invest in a variety of short-term debt securities, including government, municipal, and corporate-issued securities.

Money market fund vs. money market account

It’s important to distinguish between money market funds and money market accounts. Despite the similar names, these accounts work differently.

While money market funds are a type of mutual fund, money market accounts are a type of bank deposit account. Like checking and savings accounts, they’re FDIC-insured up to $250,000 per depositor per account type at each bank. 

Money market accounts combine some features of both checking and savings accounts. Like checking accounts, they typically allow for check, debit card or ATM transactions. Meanwhile, they allow you to earn interest on your cash, similar to savings accounts.

Money market accounts pay higher rates than you’d earn in a traditional savings account, and are more comparable to high-yield savings accounts.

How money market funds work

“Money market funds pool cash from several investors to make short-term loans to reliable borrowers, like the U.S. government and other large institutions,” Henry says. “The loans are considered low-risk and are typically repaid within a few days or weeks. The fund earns money when the borrower pays interest, which is passed back to the investors a little at a time.”

The money you earn in your money market fund comes in the form of dividends, which are often paid monthly. Many investors choose to reinvest their dividends back in the fund.

Investments

Money market funds generally invest in short-term debt securities, along with other liquid assets like cash and cash equivalents.

“A manager invests in very short-term investments like government and corporate paper, sometimes as short as overnight,” says Matthew Weinschenk, CFA and the director of research at Stansberry Research. “It’s a large and liquid market that most people don’t even know exists. These tiny, daily returns add up to a decent yield on cash savings for passive investors.”

Pricing

Unlike many investment funds, the price of a money market fund typically doesn’t rise and fall. Instead, most funds aim to keep their net asset value (NAV) at $1. You’ll usually buy and sell your mutual fund shares at $1 per share. Rather than making money on the appreciating price of the fund, you make your money on the interest as the debt securities are repaid.

While it’s not a common occurrence, a fund’s NAV can drop below $1. This event is called “breaking the buck” and might occur if a fund has had significant losses.

“During the financial crisis in 2008, the Reserve Primary Fund broke the buck, meaning it lost enough that it couldn’t maintain its $1 share price,” says Weinschenk. “Investors got most of their money back, but it took [six years for full recovery].”

Liquidity

“Liquidity for money market funds is very high, meaning you can buy or sell daily if you’d like,” says Greg Halter, the director of research for Carnegie Investment Counsel.

You can buy money market fund shares either directly through the fund itself or through a broker for the fund. Like other mutual funds, you can sell your shares back to the fund on any business day at the fund’s NAV per share (usually $1).

Mutual funds (including money market funds) trade once per day at the end of the trading day. Once you place your sell order, it should be executed after markets close and could take a couple of days to transfer the money to your bank account.

Taxes 

Interest, including the interest you earn from money market funds, is considered taxable income just like the income you earn at your job. You’ll include it on your annual tax return and will pay income taxes based on your marginal tax rate.

Interest income on municipal money market funds is exempt from federal income taxes. It’s also exempt from state income taxes when the bonds are issued within your home state.

Tax-exempt funds generally pay lower yields, but might be appropriate for high-income investors who want to shield some of their income from taxes.

Benefits and risks of money market funds

The key benefit of money market funds is the ability to store your money in a relatively safe and liquid place while earning a higher return than you would in many savings accounts.

As Henry noted, you shouldn’t expect to grow wealth in a money market fund, but you’ll earn a small return on money you want readily available in case you need it.

However, despite the relatively safe nature of these accounts, they aren’t without risks.

“One risk is in what you don’t earn, especially over time,” says Rob Edwards, managing director and senior PIM portfolio manager at Edwards Asset Management. “Money market funds tend to pay an interest rate that is very close, sometimes below, the rate of inflation. So, the trade-off to stability and liquidity is that your money is often slowly falling behind inflation and losing purchasing power.”

Because money market fund returns reflect short-term interest rates, those returns can rise and fall. In low-interest-rate environments, you’ll earn less. Take, for example, the Fidelity Money Market Fund (SPRXX), which earned 4% in 2025. The account earned just 0.01% in 2021 due to the Federal Reserve lowering the federal-funds rate in response to the Covid-19 pandemic.

Finally, while money market funds rarely lose money, it’s possible. Because they invest in short-term debt securities, you run the risk that a debt issuer (or more than one) won’t repay its debt on time, causing the value of the fund to fall. Since these funds aren’t FDIC-insured, you can’t recover your losses.

Money market fund yields and fees

According to data from the Securities and Exchange Commission, the yields on money market funds in November 2025 ranged from 3.93% to 4.20% for government and prime funds, and from 2.40% to 2.98% for municipal funds. 

“Fees for money market funds work similarly to those of stock and bond mutual funds,” Halter says. “There is an expense ratio that is subtracted from the gross yield to provide the net yield (or return) to the investor. Fees can range from 30 basis points to 70 basis points. So, if the gross yield on a money market fund is 4.00%, the net return to the investor would be 3.50%, assuming a 50-basis-point expense ratio.”

According to Halter, the expense ratios on money market funds are often higher than those on stock funds because of how often the fund manager must replace the securities. Money market funds invest in short-term debt securities, meaning the fund manager is frequently replacing assets. Meanwhile, a stock fund might buy a stock and hold it for years, which can result in lower management costs.

Another possible fee on a money market fund is called a liquidity fee. Certain funds are required to charge liquidity fees when too many investors try to sell their shares all at once. These fees can apply to prime and tax-exempt funds. Government funds aren’t required to charge liquidity fees, but they can choose to.

FAQ

Are money market funds insured like bank accounts?

Money market funds aren’t insured by the Federal Deposit Insurance Corporation (FDIC) in the same way that bank accounts like checking, savings and money market accounts are. Instead, like other brokerage accounts, they are protected by the Securities Investor Protection Corporation (SIPC), which protects you against losses in case your brokerage goes out of business.

How do money market funds differ from savings accounts?

Money market funds and savings accounts differ in terms of the type of account and the level of risk. Savings accounts are bank deposit accounts that can earn a small amount of interest, especially high-yield savings accounts, which earn more on average, with some rates comparable to those of money market funds. You don’t have to worry about losing your money, as these accounts are FDIC-insured. 

Money market funds, on the other hand, are a type of mutual fund, meaning they have a bit more risk, but also a (sometimes) higher potential return. That being said, both accounts are highly liquid and can be relatively safe places to store cash.

Can money market funds lose value?

Money market funds rarely lose value in the way that a stock fund might, but that doesn’t mean there aren’t risks. Your investment could lose value in the very unlikely event that the NAV price drops below $1 or, more likely, that your investment doesn’t keep pace with inflation, meaning your money has lost purchasing power.

What are the typical fees for money market funds?

Like other mutual funds, many money market funds charge an expense ratio to cover the fund’s administrative costs. Funds might also charge a liquidity fee in certain situations, such as when the daily net redemptions rise above a certain level.

When should an investor choose a money market fund?

A money market fund might be a good choice when you’re saving for short-term goals and want a low-risk place to park your cash. However, given the modest returns, it could be worth comparing these funds to other high-yield accounts, like high-yield savings accounts and money market accounts, to decide on the best option for you.