What is a Money Market Fund?
Money market funds invest in Treasury bills, commercial paper, certificates of deposit, and repurchase agreements with maturities under 13 months. They aim to keep NAV at a constant $1.00 per share, making them function like a high-yield savings account. As of early 2026, prime money market funds yield approximately 4.5-5.0%, significantly above the average bank savings rate of 0.5%.
Types of Money Market Funds
Government money market funds invest exclusively in US government securities and repos, offering the highest safety. Prime funds include corporate commercial paper for slightly higher yields but marginally more risk. Tax-exempt municipal money market funds invest in short-term municipal securities, providing tax-free income for investors in high tax brackets - a 4% tax-exempt yield equals roughly 5.9% pre-tax for someone in the 32% federal bracket.
Key Considerations
While extremely safe, money market funds are not FDIC-insured. In 2008, the Reserve Primary Fund 'broke the buck' when its NAV fell below $1.00 due to Lehman Brothers exposure, triggering industry-wide reforms. Post-2016 SEC rules require institutional prime funds to use floating NAV and allow liquidity fees during stress. For emergency funds and short-term savings, government money market funds remain one of the safest options available.