Money market fund

A money market fund lends money for short periods, typically days to a few months, to governments, banks and large companies, through treasury bills, commercial paper, certificates of deposit and repurchase agreements. Because the loans are short and of high credit quality, the fund’s value moves very little, and its return closely tracks short-term interest rates, minus fees. Money market funds have their own regulations in both the EU and the US, with rules on the maturity, quality and liquidity of their holdings. Some aim to keep a stable price per share; others let the price vary slightly from day to day.

Investors use money market funds for cash that is waiting to be invested or as the low-risk part of a portfolio, often inside a brokerage account where they can earn more than uninvested cash. The key misunderstanding is that they are the same as a bank deposit. They are not: they are not covered by deposit guarantee schemes, and in severe stress a fund can lose value or restrict withdrawals, as happened to a few funds in 2008. Their returns also fall quickly when central banks cut interest rates.