A money market fund is a type of mutual fund that primarily invests in short-term, low-risk, and highly liquid financial instruments. The primary goal of a money market fund is to provide investors with a safe and relatively stable place to park their cash while earning a modest return. Money market funds typically invest in instruments like U.S. Treasury bills, commercial paper, certificates of deposit (CDs), and short-term corporate debt. These investments are known for their low risk and high liquidity.
Key characteristics of money market funds include:
- Safety: Money market funds are designed to be low-risk investments. They focus on high-quality, short-term debt securities, which minimizes the risk of default.
- Liquidity: Money market funds are highly liquid, which means investors can easily buy and sell shares at or close to their net asset value (NAV). This makes them a popular choice for investors who need quick access to their funds.
- Stability: Money market funds aim to maintain a stable net asset value (NAV) at $1.00 per share. This stability is achieved by limiting the maturity and credit risk of the underlying investments.
- Income: While money market funds offer safety and liquidity, the returns they provide are typically lower compared to other investment options like stocks or bonds. Investors choose them for capital preservation and not for substantial income generation.
- Regulation: Money market funds are subject to regulatory requirements to maintain a stable NAV and adhere to certain investment restrictions. These regulations are in place to protect investors and maintain market stability.