Investing Assets & Markets Mutual Funds Advantages of Money Market Funds How to Invest in Money Market Funds By Lee McGowan Lee McGowan Lee McGowan is a certified financial planner, a certified financial analyst, and a fee-only financial advisor. He is the president and senior wealth advisor at Monument Group Wealth Advisors. His analysis and commentary have been published in The Wall Street Journal, Investor's Business Daily, and The Journal of Financial Planning (where he also served on the Advisory Board). learn about our editorial policies Updated on October 17, 2021 Reviewed by Thomas J. Brock Reviewed by Thomas J. Brock Thomas J. Brock is a CFA and CPA with more than 20 years of experience in various areas including investing, insurance portfolio management, finance and accounting, personal investment and financial planning advice, and development of educational materials about life insurance and annuities. learn about our financial review board In This Article View All In This Article What Is a Money Market Fund? SEC Rule 2a-7 Advantages of Money Market Funds The Bottom Line Photo: mapodile / Getty Images Money market funds offer higher yields than savings accounts but are relatively safer than bonds. Therefore, if you're looking for a place to keep your money that is safe and has higher interest rates than a basic savings account, money market funds can be a smart way to build your short-term savings or emergency fund. There are many types of money market funds for many types of investors. Some funds invest in U.S. Treasuries, while others might invest in riskier assets for the sake of earning higher interest rates. Chances are there is an option to suit your risk level and savings needs. What Is a Money Market Fund? A money market fund is a mutual fund that invests in short-term, high-quality fixed-income securities. The goal of a money market fund is to have a net asset value that does not deviate from $1 per share. In other words, if you invest $1,000 in a money market fund, the goal is to return $1,000 plus a nominal yield (which tends to stick close to 90-day Treasury rates). Losses in money markets have been rare, but they have occurred. Money market funds are regulated by the U.S. Securities and Exchange Commission (SEC). The SEC seeks to assure that risks are limited and to protect investors’ interests. Many firms that sell money market funds purchase extra protection through The Securities Investor Protection Corporation (SIPC). The SIPC further insures against a client's loss of money in funds that are bought from the firm. For this reason (and many others), money market funds can be a smarter way to save money than hiding it under your mattress, especially since the latter carries the risk of theft or fire. Note Money market funds are securities, not cash. So, the safeguards offered by the SIPC are not the same as what the FDIC would cover for a bank account. The SIPC does not protect against value declines, credit risks, or fees. SEC Rule 2a-7 Governs Many Features of Money Market Funds As a result of the last financial crisis of 2008, the SEC created new rules to assure investors who have money market funds that they will be stable. The rules touch on many aspects of money market funds and set standards with the intent to maintain a stable net asset value per share. Some of the highlights include: Maturity of Holdings Money market funds cannot hold investments that mature at a date after more than 397 days from purchase. The dollar-weighted average maturity of the fund cannot exceed 90 days. Credit Quality No more than 3% of assets can be invested in securities that do not fall within the first or second-highest rated categories. Diversification Money market funds must maintain a diversified portfolio. A money market fund cannot have any single holding that exceeds 5% of the value of the fund (with the exception of U.S. Treasury and government agency holdings). Advantages of Money Market Funds The regulation of money market funds is the key to their many perks: Safety The main goal of money market funds is to preserve capital. While a few money market funds have broken the buck (gone below $1) in most cases, the fund company or sponsor has stepped in to absorb the losses. Liquidity Money market funds provide easy access to cash. Some brokerage accounts offer a money market fund as a sweep option. In other words, when an investment is bought or sold, money comes out of or goes into the money market fund. Yield Money market funds pay a yield based on the underlying holdings. In most cases, the yield is automatically reinvested into the fund via the purchase of additional shares in the fund. This yield makes money market funds a more attractive choice than a savings account with no APY. Note Read the prospectus before investing in money market funds, along with other shareholder reports and data that you can access from public sources. The Bottom Line Money market funds can be a smart saving and investing tool if you want to earn higher interest rates than bank accounts but also want something safer than bonds. As with all types of securities and savings tools, money market funds may not be right for all investors, so be sure to research the details, and talk to a professional if needed. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. Fidelity. "What are Money Market Funds?" U.S. Securities and Exchange Commission. "Money Market Funds." U.S. Securities and Exchange Commission. "What We Do." SIPC. "How We Protect You." U.S. Securities and Exchange Commission. "Final Rule: Money Market Fund Reform."