Money Market Fund (MMF)
A money market fund (MMF) is an investment fund that holds short-term, high-quality debt such as Treasury bills, repo and commercial paper, and aims to keep a stable value while offering daily access. Investors use it like a deposit, but it is not one.
Also called: MMF · money market funds · money fund · money market mutual fund · money-market fund
The appeal is a market rate of interest with same-day or next-day liquidity. Many funds are managed to hold a constant share price, typically one dollar. Government funds invest only in public debt and repo backed by it; prime funds also buy bank and corporate paper for a little more yield.
A fund share is not a bank deposit. There is no deposit insurance and no promise by the manager to make up losses. If the assets fall in value or cannot be sold fast enough, the fund may suspend redemptions or let its price drop below par. In September 2008 the Reserve Primary Fund 'broke the buck' after Lehman Brothers failed, setting off a run on prime funds that ended only with a government guarantee. A similar dash for cash in March 2020 again needed central bank support.
Money market funds are the largest cash providers in shadow banking. They are also a reference point for digital money: a fiat-backed stablecoin reserve looks much like a government money fund, and tokenised fund shares are now used as on-chain collateral. Some safeguarding regimes allow client funds to be placed in qualifying funds.
In practice
Whether customer or safeguarded funds may be invested in a money market fund, and in which type, is set by the applicable regime. Do not assume a fund that is safe is also permitted.
Commonly confused with
| Term | How it differs |
|---|---|
| Bank deposit | A deposit is a debt owed by a bank and insured up to a limit. A money market fund share is an ownership stake in a pool of securities whose value can fall. |
See also
- Shadow BankingShadow banking is credit intermediation carried out by institutions and markets outside the regular banking system: money market funds, finance companies, hedge funds, securitisation vehicles and repo markets doing what banks do without bank licences, deposit insurance or central bank backing.
- Repurchase AgreementA repurchase agreement, or repo, is a short-term loan structured as a sale: one party sells securities for cash and agrees to buy them back later at a slightly higher price. The securities are the collateral and the price difference is the interest.
- Bank RunA bank run is a rush by depositors or other short-term creditors to withdraw their money from an institution because they fear it will fail. Because no bank holds enough liquid assets to repay everyone at once, the rush itself can cause the failure.
- Maturity TransformationMaturity transformation is the practice of funding long-term, illiquid assets with short-term liabilities that can be withdrawn or must be renewed quickly. It is the core economic function of banking and the source of its fragility.
- StablecoinA stablecoin is a crypto-asset designed to hold a steady value against a reference, almost always a fiat currency such as the US dollar. How that steadiness is supported differs sharply from one issuer to the next, and so does what a holder can actually redeem.
- Permissible InvestmentsPermissible investments are the categories of asset a licensed US money transmitter may count against its outstanding money transmission obligations. Under the model law states have been adopting, the licensee must hold permissible investments worth at least the whole of what it owes customers, and the eligible list runs wider than cash and government securities.