Money Market Funds are often seen as a safe harbor for cash, but many people have questions about how they operate, especially concerning their yields and safety. As experts at money-central.com, we’re here to clarify some frequently asked questions about money market funds.
Why Are Money Market Fund Yields Sometimes So Low?
You might notice that yields on money market mutual funds can be quite low at times. This is primarily because money market funds invest in a diverse portfolio of high-quality, short-term, interest-bearing securities. The income generated from these securities, minus fund fees, is then passed on to the fund’s investors. Therefore, when the returns on these underlying short-term securities are low, the yields for money market fund shareholders will also be low. A significant factor influencing these short-term interest rates is the monetary policy of the Federal Reserve (the Fed). The Fed’s interest rate decisions are a key driver in determining the yields you see in the money market.
What Does “Short-Term” Investment Really Mean for Money Market Funds?
When we say money market funds invest in “short-term” securities, how short are we talking? Regulations dictate that money market funds are only permitted to purchase securities that mature in 397 days or less. Furthermore, to ensure liquidity, at least 50% of a fund’s total assets must be held in “Weekly Liquid Assets.” These highly liquid assets include cash, direct U.S. government obligations like Treasury bills, certain U.S. government agency debt maturing within 60 days, and securities maturing or payable within 5 business days. For taxable money market funds, the requirements are even stricter, with at least 25% of assets in “Daily Liquid Assets,” consisting of cash, direct U.S. government obligations, or securities maturing or payable within just one business day. While some investments can be slightly longer-term, the overall weighted average maturity of the entire money market fund portfolio must remain at 60 days or less. This focus on very short-term maturities is central to the nature of money market funds.
Are Money Market Funds Protected by Government Insurance?
It’s a common misconception that money market funds might be government insured. However, the U.S. government does not offer insurance on any type of mutual fund, including money market funds. Unlike bank deposits which are insured by the FDIC, money market mutual funds are considered investments, similar to bond funds or stock funds. As investments, they are not guaranteed and carry a degree of risk. It is crucial for investors to understand that while money market funds are generally considered very low-risk, they are not risk-free and are not backed by government insurance.
