What it means
A money market fund is not a bank account, though it often feels like one. Investors buy units in a fund that lends short-term to governments, banks and large corporates, and the interest earned flows back to unit holders after fees.
Maturities are deliberately short, typically measured in days or weeks, which keeps price risk low. The commercial appeal is straightforward.
A business holding $3,000,000 of operating cash in a low-interest current account earns almost nothing, while the same money in a money market fund can earn close to the prevailing short-term rate with daily liquidity. For treasurers, that difference is one of the easiest yield improvements available.
Funds come in distinct flavours. Government funds hold only government securities and repurchase agreements, prime funds add corporate and bank paper for slightly higher yield and slightly higher risk, and tax-exempt funds hold municipal debt.
Some funds maintain a stable $1.00 unit price while others float their net asset value, a distinction that matters for accounting and for how the fund behaves under stress. The risks are small but real.
Money market funds are investments rather than deposits, so they are not covered by deposit insurance, and in severe market stress a fund can impose redemption gates or liquidity fees. The rare event of a fund's unit price falling below $1.00, known as breaking the buck, has happened and reminds treasurers that "cash equivalent" is not the same as "cash".
Yield is quoted as a seven-day yield, which annualises the fund's income over the previous week net of fees. Because holdings mature constantly, that yield tracks central bank policy rates closely, rising quickly when rates rise and falling quickly when they fall.
This makes money market funds attractive in tightening cycles and much less so when rates approach zero.
In practice
Real-world examples.
Example
A software company that has just raised $20,000,000 places most of it in a government money market fund while the hiring plan ramps up. The cash remains available at one day's notice, and the fund income partly offsets the cost of the new hires.
Example
A property developer holds buyer deposits that must be returned or applied at completion. It uses a money market fund rather than a term deposit because the timing of completions is uncertain and locking the money up would create a settlement risk.
Example
A charity's finance committee moves its three-month operating reserve from a current account into a money market fund after reviewing the fund's holdings. The committee accepts the absence of deposit insurance in exchange for the additional yield and documents the decision in its investment policy.
Think of it
“Money market fund is very safe, liquid savings-like a bank account but with securities.
Formula
Calculation
Income = balance x annual yield x (days held / 365).
A company places $2,500,000 of surplus cash in a government money market fund quoting a 4.80% seven-day yield, and leaves it there for 30 days.
Income = $2,500,000 x 4.80% x (30 / 365) = $120,000 x 30 / 365 = $9,863.
Had the same money stayed in a business current account paying 0.50%, the income would have been $2,500,000 x 0.50% x (30 / 365) = $12,500 x 30 / 365 = $1,027. The difference of $9,863 - $1,027 = $8,836 for a single month is why treasury policies usually require operating cash above a defined buffer to be swept into a money market fund automatically.Case study
Seen in the real world.
Consider this illustrative and fictional case. Brightsail Logistics, an invented distribution company, kept an average of $8,000,000 in operating cash spread across three bank accounts earning almost nothing. Its new finance director calculated that at prevailing short-term rates the company was forgoing roughly $350,000 a year in income.
She proposed sweeping everything above a $2,000,000 working buffer into a government money market fund. The board's concern was access: could the money be back in the bank account fast enough to pay a supplier run. The answer was same-day for instructions given before the fund's cut-off time, which was earlier than the company's usual payment routine.
Brightsail adopted the sweep but moved its payment run to the morning to fit the cut-off, and it split the balance across two fund providers to avoid single-provider concentration. The extra income funded two additional operations roles, an outcome that came entirely from managing cash the company already had.
Watch out
Common mistakes.
- Treating a money market fund as an insured bank deposit, when it is an investment whose value, though very stable, is not guaranteed.
- Ignoring the fund's daily cut-off time, which can leave a company unable to fund a payment run it assumed was covered.
- Chasing the highest quoted yield without checking whether it comes from a prime fund holding corporate paper rather than a government fund, since the extra yield reflects extra credit risk.
Questions
People also ask.
Is a money market fund the same as a savings account?
No, a savings account is a bank deposit protected within insurance limits, while a money market fund is a pooled investment in short-term securities with no such protection.
What does breaking the buck mean?
It describes a stable-value fund whose net asset value falls below $1.00 per unit, a rare event that causes investors to lose a small amount of principal.
Can money market funds be used as cash equivalents in the accounts?
Generally yes, provided they are readily convertible to known amounts of cash with insignificant risk of value change, but the treatment should be confirmed with your auditor.
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