Money market fund

A money market fund is an investment fund that invests exclusively in short-term, highly liquid, and low-risk financial instruments. Typical securities in such funds include time deposits, short-term government bonds, and high-quality corporate bonds with remaining maturities of typically less than twelve months. The goal of these funds is to provide investors with a return that closely tracks current money market rates, while keeping the capital available at all times.

A key feature of money market funds is their role as an alternative to traditional checking or savings accounts. While banks often delay adjusting their interest rates, money market funds typically pass on central bank interest rate changes directly to investors. Since the securities held have very short maturities, money market funds are also less sensitive to interest rate fluctuations than conventional bond funds with long maturities. This ensures comparatively low volatility.

Despite their high level of security, money market funds are not entirely risk-free. There is a low issuer risk if a debtor of the securities held in the fund becomes insolvent. In addition, management fees can reduce returns. In an environment of rising or stable interest rates, however, they serve as a parking place for liquidity for many investors, as they combine security with a market-based return and can generally be traded on a daily basis. Another advantage is the lower risk of insolvency compared to bank deposits: first, the securities constitute a special fund, and second, the credit risk is reduced by broad diversification.