Money market funds

A money market fund is a financial term you need to understand. Here’s what it means.

What are money market funds?

A money market fund is a mutual fund that invests in a high-quality, short-term debt. The goal of a money market fund is to preserve capital while obtaining a nominal yield. A money market fund is often used by companies and institutions to manage their short-term cash needs.

Deeper definition

Businesses require ready access to cash and other highly liquid investments to fund their obligations. Money kept at the bank earns very low rates of interest, whereas money market funds provide better returns and are considered extremely safe investments.

Money market fund invest in very secure investments, such as short-duration treasury bondscertificates of deposit (CDs), and short-duration corporate debt. These are considered to be safe, and because most of a money market’s investments have a short duration, there’s very little risk of losing money. To preserve liquidity, money market funds don’t invest in long-term investments and are required by the Securities and Exchange Commission (SEC) to ensure that the average maturity period of all investments is less than 90 days.

Money in a money market fund is readily accessible, and some funds operate in a similar fashion to a bank account. While offering flexibility, most money market funds have restrictions on the minimum size of the initial deposit, and there’s often limits placed on the number of transactions and the minimum amount that can be withdrawn.

Money market fund example

Kenneth and Abbey have just sold their home and are looking to purchase a new property. They believe it will take a few months to find the right place and decide to put the $175,000 they cleared from the sale of their old home into a money market fund to preserve their capital until they need it. They will earn some interest on the funds and have immediate access to their money.

Have you got some cash that you don’t want to tie up in a long-term investment? Use Bankrate’s guide to money market fund rates to find the best option.

More From Bankrate