What it means
A money market fund pools investors' cash and lends it for short periods to borrowers who need funds quickly. A Treasury money fund limits those borrowers to the US government, so the main assets are Treasury bills, which are short-term government debt that matures in a year or less.
Because the loans are short and the borrower is the government, the fund aims to keep price swings very small. Most of these funds aim to hold a stable price of $1.00 per share, so the investor's balance changes through added income rather than a moving share price.
The income is usually paid out or reinvested monthly. The yield moves in line with short-term interest rates set by the central bank, so it rises when rates rise and falls when they fall.
For companies, these funds are a common home for surplus cash, tax reserves and funds waiting to be spent. They normally pay more than an ordinary bank current account, and can usually be sold on the same day or the next business day.
Treasurers compare them with bank deposits, which are covered by deposit insurance up to a limit, whereas money market funds are not. The word safe needs care.
A Treasury money fund holds very low credit risk assets, but it is not a bank deposit, it is not insured by the government and its price is not formally guaranteed. In rare periods of market stress, funds have faced heavy withdrawals, and rules now allow some funds to charge fees or limit withdrawals in particular conditions.
There is a small tax point too. Interest on direct US Treasury obligations is generally exempt from state and local income tax, and funds that hold only Treasury securities may pass that benefit through, subject to the rules in each state.
Funds that also hold repurchase agreements may qualify differently, so the fund documents and local advice should be checked.
In practice
Real-world examples.
Example
A software company receives $5,000,000 from customers in advance and will not spend it for three months. The treasurer places it in a Treasury money fund to earn income while keeping the cash available.
Example
A property developer holds $1,200,000 in tax payment reserves due in six months. The finance team uses a Treasury money fund because it avoids credit risk to banks and allows withdrawal when the tax bill falls due.
Example
A family business keeps its emergency cash fund of $150,000 in a Treasury money fund. It checks the fund's yield and expense ratio each quarter and compares the net return with a bank savings account.
Formula
Calculation
Annual income = fund balance x annual yield
For illustration, assume a yield of 4% and a company balance of $2,000,000. Annual income = 2,000,000 x 4% = $80,000, which is about 80,000 / 12 = $6,667 a month. If the yield fell to 3%, income would fall to 2,000,000 x 3% = $60,000, a drop of $20,000 a year. The yield changes with interest rates, so the rate used here is only an assumption.Case study
Seen in the real world.
Larchmont Logistics is an illustrative, fictional company that held $8,000,000 of operating cash in several bank accounts earning almost nothing. The finance director wanted to earn more without taking credit risk on lenders.
She moved $5,000,000 into a Treasury money fund and kept $3,000,000 in bank accounts for daily payments. At a yield of 4% the fund earned $200,000 a year, compared with about $15,000 on the same amount in the bank.
She also set a policy that no more than 60% of cash could be held in any one fund, and that the board would review the arrangement every quarter. The illustrative lesson is that a Treasury fund can improve returns on idle cash, but liquidity needs, limits and monitoring remain part of good treasury practice.
Watch out
Common mistakes.
- Treating the fund as a bank deposit, when it is not covered by deposit insurance and is not guaranteed.
- Assuming the yield is fixed, when it moves with short-term interest rates.
- Ignoring the fund's expense ratio, which reduces the income paid to investors.
Questions
People also ask.
Is a Treasury money fund risk free?
No, it holds very low risk assets, but the fund itself is an investment product that is not insured and can in rare cases fail to hold its price.
How quickly can I get my cash back?
Most funds allow redemption on the same or next business day, although the terms in the fund documents apply.
How does it differ from a prime money market fund?
A prime fund can hold corporate and bank debt for a higher yield and more credit risk, while a Treasury fund sticks to government obligations.
From the founder's library
Take it further with the book.
Build your financial confidence beyond this definition. Shihan's full-length guide, Accounting Fundamentals, takes the same plain-English approach and turns it into a complete, practical playbook for non-finance managers, business owners and students - with chapter-end quiz answers and presentation slides included.
25% off with code MMHQ25, applied at checkout. Priced in USD - checkout may show the equivalent in your local currency.
View the book and save 25%