Money Market Fund

Also known as: MMF, Geldmarktfonds, Cash fund

The mutual fund that pretends to be a bank account — cash parked in the market's overnight instruments.

5 min read · 853 words · Updated

1 · SnapshotThe one idea to remember
Key intuition: an MMF is a bank without capital or insurance, whose safety is rebuilt every morning by holding assets so short-dated that almost nothing can happen to them before they mature. "Almost" is the operative word.
2 · BeginnerWhat is it, really?

A money market fund is a mutual fund with one job: make cash earn the market's short-term interest rate while staying instantly available and never losing value. It pools investors' money and lends it out for days or weeks at a time — to the US government (Treasury bills), to banks (certificates of deposit, repo) and to corporations (commercial paper).

The share price is engineered to sit at a constant $1.00 (or €/£ equivalent), so the fund feels like a bank account: deposit today, withdraw tomorrow, collect a yield that tracks the central bank's rate almost immediately. When the Fed hikes, MMF yields move within days — while bank deposit rates crawl. That gap is why US money funds swelled to record size after 2022's rate hikes.

But the resemblance to a bank account is a costume. There is no deposit insurance and no bank promising your balance: you own shares in a portfolio, and its stability comes only from the portfolio being very short, very diversified and very high-quality. In 2008 one famous fund's shares fell to $0.97 — three cents that triggered a global panic.

Why redeeming first can be worth something
The investorThe funda pool of paperShort-term marketwhere it invests1Cash, at the dealingcut-off4Cash, from the fund'sassets5A fee or a gate may apply2Bills and commercial paper arebought3Interest accrues

a paymentsomething deliveredonly if a condition is met

There is no counterparty to sell to. You transact with the fund, and the cost of your exit falls on whoever stayed.

When you subscribe

  1. The investor → The fund Priced at the value struck for that cut-off. There is no screen price and nobody is on the other side.
  2. The fund → Short-term market Short maturities, high quality — but not instantly saleable in size when everybody wants out at once.

Every day

  1. Short-term market → The fund The yield passes through to holders after fees, usually as extra units.

When you redeem

  1. The fund → The investor If the fund has to sell to pay you, the cost of that sale is borne by the investors who remain — which is precisely the incentive to redeem before they do.

Under stress

  1. The fund → The investor Liquidity fees and redemption gates exist to remove that first-mover advantage. In 2008 a fund that broke the buck showed what happens without them.
Asset class
Money markets (pooled)
Instrument type
Open-ended fund holding T-bills, repo, CP, CDs
Traded
Daily (or intraday) subscriptions and redemptions at NAV
Typical users
Corporates, treasurers, retail cash, sweep accounts

Which risks decide the outcome

Not how risky this is, and not a rating — there is deliberately no total. It says which of five failure modes drives what happens here, in the same order on all 129 products so they can be compared. This publication's own reading; see the notice below.

  • Marketmatters
  • Creditmatters
  • Liquiditydecides it
  • Fundingbarely applies
  • Operationalmatters

What decides it here. Redeeming first has value when the fund must sell to pay you, because the cost falls on whoever stayed. Fees and gates exist to remove that incentive.

What the five mean, and which one decides where →

3 · IntermediateHow it works in practice

What's inside, and the rules that shape it

US rule 2a-7 (mirrored by the EU's MMF Regulation) constrains portfolios on three axes — maturity, quality, liquidity:

$$ \mathrm{WAM} = \textstyle\sum_i w_i\, t_i^{\text{reset}} \le 60\ \text{days}, \qquad \mathrm{WAL} = \sum_i w_i\, t_i^{\text{final}} \le 120\ \text{days} $$
What the symbols mean
  • wa weight in a portfolio
  • ta point in time

plus minimum daily (10%+) and weekly (25–50%) liquid assets. The two maturity measures differ because floating-rate paper resets its rate quickly (helping WAM) while its principal stays out longer (caught by WAL).

The fund taxonomy

  • Government funds: ≥99.5% Treasuries, agencies, and repo backed by them — the default cash vehicle post-reform, allowed to keep the fixed $1.00 NAV.
  • Prime funds: add bank CDs and corporate CP for ~10–20bp of extra yield — and carry the credit and run risk that reforms keep trying to cage (institutional prime funds must float their NAV to 4 decimals).
  • EU flavours: CNAV (public debt only), LVNAV (constant NAV while shadow NAV stays within 20bp) and VNAV — the LVNAV "collar" being the EU's compromise between accounting convenience and honesty.

Yield mechanics

Funds quote a 7-day yield — the past week's net income annualised — which tracks the policy rate minus the expense ratio:

$$ y_{7d} = \frac{\text{net income per share over 7 days}}{\text{NAV}} \times \frac{365}{7} $$
What the symbols mean
  • ythe yield to maturity
Worked example — breaking the buck: September 2008, the Reserve Primary Fund holds $785m of Lehman CP — 1.2% of assets. Lehman files; the paper is marked near zero; NAV prints $0.97. Institutional investors, who lose nothing by redeeming first, pull some $300bn from prime funds in the week of 15 September 2008, and the US Treasury ends up guaranteeing the entire industry. Three cents, systemic crisis.
4 · AdvancedPricing & valuation

The run mechanics: why "stable" NAV creates instability

A fixed $1.00 share price on a portfolio worth fractionally less hands early redeemers a free option: redeem at par, leave the loss concentrated on whoever stays. The first-mover advantage is structural, which is why reform has iterated three times (2010: liquidity floors; 2014: floating NAV + gates for institutional prime; 2023: mandatory liquidity fees above 5% daily outflows, gates abandoned) — each round trying to make the redeemer pay their own liquidity cost. March 2020 proved the 2014 design perverse: funds defended their weekly-liquidity thresholds (whose breach could trigger gates) by refusing to use that liquidity, amplifying the run the buffers were meant to stop.

MMFs as monetary plumbing

  • The Fed's RRP facility lets government funds place cash directly with the central bank — at its 2022–23 peak $2.5tn of MMF money sat there, making funds the marginal setter of the repo floor and the shock absorber for T-bill supply swings (RRP drained toward zero as bill issuance surged in 2023–24).
  • Sponsor support is the industry's unbooked capital: Moody's counted 60+ episodes of sponsors quietly buying bad paper off their funds pre-2008 — support that is voluntary, reputational and gone exactly when needed.
  • Eurodollar transmission: prime funds are marginal buyers of non-US banks' dollar CP/CD funding; every prime-fund run (2008, 2016 reform, 2020) shows up instantly in FX swap basis and foreign banks' dollar costs.

The competitive frontier

Tokenised MMFs (BlackRock's BUIDL, Franklin's BENJI) put fund shares on public blockchains — collateral that moves in minutes, aimed at the settlement role stablecoins occupy without paying yield. The regulatory perimeter question — when does a yield-bearing instant-settlement token become a deposit? — is the same one MMFs have posed to banking since the 1970s, in new clothes.

The formulas above are standard textbook formulations, simplified for teaching. They explain the mechanism — they are not a valuation tool, and they will not reproduce a dealer’s price.

5 · Desk notesHow practitioners think about it
Practitioner note: evaluate an MMF the way regulators do — WAM/WAL, weekly liquid assets, top-10 issuer concentration, and the sponsor's balance sheet — not by its 7-day yield. In this asset class, the extra 10bp is never the reward for skill; it is the fee you are collecting for a risk someone will eventually name.

Now say it back

Close the page and give Money Market Fund in four sentences. It takes a minute and it is the only way to find out whether reading it was enough.

  1. Who wants what — two parties wanted opposite things badly enough to write it down.
  2. What the contract obliges, and when — not the payoff; the obligation.
  3. Where the money comes from — name the source, or you have described a hope.
  4. What makes it lose — the ordinary way, not the dramatic one.

Do it with a clock → · why these four

Put Money Market Fund beside any other instrument →

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Repo

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Corporate IOUs measured in days — how blue-chip companies borrow between bond issues and bank lines.

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