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Money market funds

Understanding money market funds

Money market funds are a type of mutual fund that invests in liquid, short-term debt securities, with lower risk compared to other mutual funds and investments. Investments can include short-term U.S. Treasury securities, federal agency notes, repurchase agreements, certificates of deposit, corporate commercial paper, and obligations of states, cities, or other municipal agencies, depending on the focus of the fund.

Most government and retail money market funds generally seek to keep their net asset value (NAV) at a stable $1.00 per share, using special pricing and valuation conventions. The NAV of a mutual fund is the fund's total assets minus its total liabilities, divided by the number of shares outstanding.

You should consider the investment objectives, risks, charges, and expenses of money market funds carefully before investing. You can find this information in each fund's prospectus, available on the fund's website.

Read more about money market funds on the SEC's website.

Trading money market funds

You can place a money market trade order anytime during normal market hours, 6:30 AM to 1:00 PM PT. Orders execute after market close and are filled at that day's NAV. If you place an order outside market hours, it queues and executes at the close of the next trading day, the same as other order types on Frec.

Money market funds only trade as market orders; they can't be placed as limit orders. Most shares settle one business day after the trade date.

Because a fund's NAV can fluctuate slightly above or below its target, your order fills at whatever NAV is calculated after market close, not necessarily the price you saw when you placed it. You can find your exact fill price on your trade confirmation (Account settings > Documents) or in your Activity tab.

Keep in mind: Because redemptions settle the next business day, money market fund proceeds aren't available for same-day reinvestment into another security. If timing matters, a portfolio line of credit can bridge that gap, letting you buy immediately and pay down the balance once your redemption settles.

7-day SEC yield

The 7-day SEC yield is calculated by annualizing the fund's daily income distributions for the previous 7 days, assuming the rate stays the same for one year. It's the fund's total income minus expenses, divided by the total number of outstanding shares, and includes any applicable waiver or reimbursement.

Expense ratio

The expense ratio is expressed as a percentage and represents fees charged to you as an investor to cover the fund's operating costs on an annual basis. This fee is automatically deducted from dividend and capital gains distributions and factored into the fund's daily income calculation, which is reflected in your daily dividend.

You can calculate the dollar amount of the expense ratio by multiplying the expense ratio by the dollar amount of your investment. For example, if a money market fund has an expense ratio of 0.25% and you own $1,000 worth of shares, you'll pay $2.50 each year to the manager of the fund.

Inception date

A money market fund's inception date is the date it was first available to investors.

Minimum investment

The minimum investment is the smallest amount you're permitted to invest in your first trade of that money market fund. For example, if the minimum investment is $300, your first buy order must be at least $300.

These minimums are typically set by a fund to keep small, short-term trades from affecting cash flows and the fund's daily management.

Dividend schedule

Dividends are declared daily and typically paid monthly, on the first business day of the following month. Money market funds generally don't pay capital gains distributions, and a fund may occasionally not declare or pay a scheduled dividend.

Risks of investing in money market funds

Money market funds carry three main risks:

  • Interest rate risk: Rising rates generally reduce the value of a fund's holdings, and falling rates generally increase it.
  • Liquidity risk: Can arise from market volatility or limited liquidity in the fund's underlying securities.
  • Credit risk: Can occur if an issuer fails to repay a security, time deposit, or repurchase agreement, or if a credit rating agency downgrades a security or issuer.

You could lose money by investing in money market funds. Although the funds seek to preserve the value of your investment at $1.00 per share, they can't guarantee they'll do so. An investment in the funds isn't insured or guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other government agency. The funds' sponsors have no legal obligation to provide financial support to the funds, and you shouldn't expect them to.

Additionally, some money market funds (particularly institutional prime and institutional tax-exempt funds) may impose a liquidity fee upon sale of your shares if the fund experiences significant net redemptions, or if the fund's board determines a fee is in shareholders' best interest. Unlike in the past, funds can no longer temporarily suspend your ability to redeem shares.

Despite the above risks, money market funds are relatively low risk compared to other mutual funds and most other investments. See the SEC's money market fund description.