TL;DR. A money market fund (MMF) is a mutual fund that holds very short-term, high-quality debt — Treasury bills, repo, agency paper, top-rated commercial paper — and tries to keep a stable $1.00 share price. As of the week ending June 3, 2026, U.S. money market funds held a record $7.89 trillion, up $109 billion in one week (ICI). MMFs are governed by SEC Rule 2a-7, which dictates maturity, credit quality, diversification, and liquidity. They are not bank deposits — there is no FDIC insurance — and they can “break the buck” in extreme stress, as the Reserve Primary Fund did in September 2008. This piece explains the structure, the math behind the yield, and where the real risks hide.
What a money market fund actually is
An MMF is a mutual fund registered under the Investment Company Act of 1940 whose investment universe is restricted to very short, very high-quality debt. The fund’s net asset value (NAV) per share is calculated daily. For most retail MMFs, the NAV is reported as a stable $1.00 using amortized-cost accounting; for institutional prime and tax-exempt funds, the NAV floats and is reported to four decimal places (e.g., $1.0002).
The framework that makes a stable-NAV fund possible is SEC Rule 2a-7. The rule sets quantitative limits on every portfolio:
- Weighted average maturity (WAM): 60 days or less.
- Weighted average life (WAL): 120 days or less.
- Final maturity per security: typically 397 days or less.
- Credit quality: highest short-term ratings; the board must determine each holding presents minimal credit risk.
- Diversification: no more than 5% of assets with any single non-government issuer.
- Daily liquid assets: at least 25% of total assets in cash, Treasuries, or assets maturing within one business day.
- Weekly liquid assets: at least 50% in Treasuries or assets maturing within five business days.
The point of those rules is plumbing: a fund whose holdings mature so quickly that the portfolio’s market value rarely drifts more than a few basis points from amortized cost — keeping the share price visibly anchored at $1.00.
The three types of MMF, by mandate
Every MMF you can buy fits into one of three buckets, and the bucket determines what it owns, what it yields, and how it’s taxed.
| Fund type | What it holds | U.S. AUM | NAV |
|---|---|---|---|
| Government | ≥99.5% Treasuries, agencies, repo on them | $6.51T | Stable $1.00 |
| Prime | Adds top-rated commercial paper, bank CDs, ABCP | $1.24T | Retail $1.00; institutional floats |
| Tax-exempt (muni) | Short-term municipal notes & variable-rate demand obligations | $146B | Retail $1.00; institutional floats |
Government funds dominate because, after the 2023 SEC reforms, large institutional cash pools concentrated there to avoid the mandatory liquidity fees that now apply to prime and tax-exempt institutional funds. Prime funds pay a few basis points more in yield because they carry small amounts of commercial-paper credit risk; tax-exempt funds quote lower stated yields but their interest is exempt from federal income tax (and often state tax in the issuer state), so the tax-equivalent yield can be competitive for high-bracket investors.
A worked example: how the yield gets to you
Suppose a government MMF holds a portfolio with the following weights and yields:
| Holding | Weight | Yield | Contribution |
|---|---|---|---|
| Overnight Treasury repo | 55% | 3.65% | 2.01% |
| 4-week T-bills | 25% | 3.62% | 0.91% |
| 3-month T-bills | 15% | 3.58% | 0.54% |
| Agency discount notes | 5% | 3.70% | 0.19% |
| Gross portfolio yield | 100% | — | 3.65% |
| Less: fund expense ratio | — | — | −0.15% |
| Net 7-day SEC yield to investor | — | — | 3.50% |
Two things to notice. First, the headline number on a fund’s web page is the 7-day SEC yield, which annualizes the income earned over the last seven days net of expenses. It is backward-looking, so it lags when the Fed moves. Second, fees matter — a 15 basis-point expense ratio on a fund yielding 3.65% gives up about 4% of the yield. There are MMFs that charge 0.05% and others that charge 0.40%; same Treasuries inside, very different take-home rate.
NAV mechanics: amortized cost and “breaking the buck”
Stable-NAV funds price holdings at amortized cost, which assumes the security accretes smoothly to par over its life. Because the portfolio is so short, this assumption is almost always within a fraction of a cent of the market price. SEC rules require funds to also shadow-price the portfolio daily using market prices. If the shadow price drifts more than 0.5% from amortized cost, the fund must reprice — that is the formal definition of “breaking the buck.”
It has happened twice in modern U.S. history. The Community Bankers U.S. Government Money Market Fund broke the buck in 1994 over interest-rate derivatives. The far more consequential failure came on September 16, 2008, when the Reserve Primary Fund announced an NAV of $0.97 a share after writing its $785 million of Lehman Brothers commercial paper to zero. Redemptions exceeded 50% of the fund’s assets in two days, the Treasury extended a temporary guarantee program for MMFs to stop a broader run, and the fund was wound down — investors ultimately receiving about $0.991 per share (Reserve Primary Fund history). The episode is the reason every later MMF rule exists.
The 2023 SEC reforms — what changed
The 2008 episode, plus a near-repeat during the March 2020 dash-for-cash, prompted the SEC to revisit Rule 2a-7. The 2010 amendments added the first liquidity floors. The 2014 amendments forced institutional prime and tax-exempt funds to float their NAV and let boards impose redemption gates if weekly liquid assets fell below 30%. Industry response was simple: trillions of dollars migrated from prime to government funds to avoid the gating possibility.
The 2023 final rule (SEC Press Release 2023-129, Release No. IC-34959, adopted July 12, 2023) rewrote that bargain:
- Gates removed. No MMF can suspend redemptions at the board’s discretion any more. Liquidity events are addressed with prices, not closed doors.
- Mandatory liquidity fee. Institutional prime and tax-exempt funds must impose a fee — typically 1% to 2% of net redemptions — when net daily redemptions exceed 5% of fund assets and the fund’s costs of meeting them exceed a de minimis level.
- Higher liquidity minimums. Daily liquid assets raised from 10% to 25% of total assets; weekly liquid assets raised from 30% to 50%.
- Better stress reporting. Funds report more granular liquidity data to the SEC on Form N-MFP.
The practical effect is that an institutional cash desk now picks between a government MMF with no fee mechanic but slightly lower yield, or a prime MMF with a few extra basis points but the possibility of a one-day fee in a stress event. Retail prime and tax-exempt funds keep the stable $1.00 NAV and are exempt from the mandatory liquidity fee — the SEC’s view is that retail flows do not drive the kind of fast institutional run that gates were originally designed for.
MMFs vs the alternatives
An MMF is not the same as a bank deposit, a CD, or a short-bond fund — and the difference matters when something goes wrong.
| Cash vehicle | Insurance | Liquidity | Rate behavior |
|---|---|---|---|
| Bank savings / checking | FDIC up to $250k/person/bank | Same day | Slow to follow Fed; “sticky” |
| Government MMF | None (SIPC custody, not principal) | Same day (T+0) | Tracks SOFR / ON RRP closely |
| Prime MMF (retail) | None | Same day | SOFR plus 5-15 bps |
| 3-month bank CD | FDIC up to $250k | Locked until maturity | Fixed at issue |
| Ultra-short bond fund | None | T+1 settlement | Higher yield, mark-to-market NAV can fall |
Government MMFs follow the Fed almost in real time. The chart below sketches the relationship: an MMF’s net yield sits a few basis points below the short end of the Treasury curve, which itself anchors near the federal funds effective rate.
The real risks investors miss
Because the share price barely moves, the temptation is to treat MMFs as equivalent to insured cash. They are not. The honest risk list is short but real.
- Credit risk in prime funds. A government MMF holds Treasuries and Fed-collateralised repo; the only way to lose principal is the U.S. Treasury defaulting. A prime fund holds commercial paper, CDs, and asset-backed CP — diversified, top-rated, but not riskless, as 2008 proved.
- Liquidity-fee risk for institutional prime/tax-exempt. Post-2023, a stressed institutional fund can charge a redemption fee of 1-2% on a single day’s net flows. Retail investors are exempt but should still understand the difference.
- No FDIC insurance. Sweep cash inside a brokerage MMF is covered by SIPC for custody (the broker not losing your shares), not for principal loss on the fund itself.
- Reinvestment risk. When the Fed cuts, MMF yields follow within days. Locking in a 3-month CD or a Treasury bill ladder may be a better choice if you have a known short horizon.
- Sponsor support is voluntary. In 2008, several fund families injected capital to keep their MMFs at $1.00. That support is not legally required and may not arrive in a serious stress event.
How to evaluate a specific MMF
Five numbers are enough for most decisions:
- 7-day SEC yield (subsidized and unsubsidized). The subsidized figure includes temporary fee waivers; the unsubsidized is what you’d earn without them. Compare the unsubsidized number across funds.
- Expense ratio. 0.05% to 0.20% is normal for large institutional share classes; 0.30%+ retail classes are common and expensive.
- Portfolio type. Government, prime, or tax-exempt — determines your floor in a stress event.
- WAM and WAL. Both reported in the fund’s prospectus/fact sheet. Lower means faster repricing when the Fed moves.
- Daily and weekly liquid assets. Reported on Form N-MFP. Anything well above the 25% / 50% minimums is conservative.
Related concepts
If MMFs interest you, the next step is the plumbing the funds plug into. The repo market is where most MMF cash actually gets deployed overnight, and Treasury auctions set the yield on the bills MMFs hold. The Fed’s yield curve determines whether parking cash in MMFs versus extending duration into longer bonds is the better trade — when the curve is inverted, as it has been for much of the last three years, the short end pays you the most for taking the least price risk.
Sources
- Investment Company Institute — weekly money market fund assets (data as of June 3, 2026).
- Federal Reserve H.15 Selected Interest Rates — federal funds effective and 4-week T-bill (June 8, 2026).
- SEC Press Release 2023-129 — Money Market Fund Reforms final rule (Release IC-34959), July 12, 2023.
- SEC investor.gov — basics on money market funds.
- Reserve Primary Fund — September 2008 break-the-buck event.
- FDIC — deposit insurance coverage. SIPC — what SIPC does and does not protect.
Disclosure: This article was produced with AI assistance and reviewed before publication. It is for informational purposes only and is not investment advice.