Money market funds

A money market fund is a type of mutual fund that invests in short-term, low-risk instruments. It is often compared with a bank deposit, but the two are not the same. This page explains what these funds hold, how their price moves, and the risks involved.

What a money market fund holds

A money market fund pools money from many investors and uses it to buy short-term debt instruments. These can include treasury bills, short-term bank deposits, and commercial paper issued by sound institutions. The fund manager aims to keep the portfolio short in maturity so the money stays accessible.

The holdings are chosen for safety and easy conversion to cash rather than for high growth. Because the instruments mature quickly, the fund can reinvest as conditions change. This is why money market funds are often described as a place to park cash for a short period.

The fund does not hold shares or long-term bonds in any meaningful way. Its return comes from the interest earned on the short-term instruments it holds, after the fund's expenses are deducted.

How the price moves and how liquid it is

A money market fund is usually valued at a stable price, with income accruing daily. The price moves only slightly, and any movement reflects changes in the underlying instruments and the fund's expenses. Some funds aim to keep the price fixed, while others let it float within a narrow range.

Liquidity is generally high. Investors can usually redeem units on any business day, though the fund may take a short time to settle. Some funds apply a small charge or a notice period for very early exits.

The return you see is not fixed in advance. It changes as the instruments held by the fund mature and are replaced at new rates. That is why the profit rate on a money market fund can differ from month to month.