Money Market Fund
Also known as: MMF, Geldmarktfonds, Cash fund
The mutual fund that pretends to be a bank account — $7 trillion parked in the market's overnight instruments.
- 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
1 · SnapshotThe one idea to remember
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 past $7 trillion 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.
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:
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:
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.