Money market funds are a type of mutual fund that invests in high quality short-term debt.
They pay dividends that generally reflect short-term interest rates.
Money market funds try to maintain a stable value called a “net asset value” or NAV, typically $1.00 per share.
Many investors use money market funds to store cash, or as an alternative to investing in the stock market.
Money market funds should not be confused with deposit accounts at banks.
Bank accounts are insured. An investment in a money market fund has no guarantee against losses.
Money market funds are considered to be a fairly safe investment; however, there are many risks and fees.
While the fund’s managers try to keep the NAV stable, the yield changes over time.
These changes generally reflect changes in short-term interest rates.
If the fund’s NAV falls below $1.00 a share due to losses in the underlying investments, it is called “breaking the buck” and investors who sell their shares will lose money.
Also, if short-term interest rates are very low, it is possible that fees that investors pay will exceed the income earned on fund investments.
As with any investment, you should always consider the impact of fees on your investment.