A money-market fund is a mutual fund invested in short-term high-quality debt. It is not a bank deposit. At a brokerage, it is often the highest-yielding option for a household's idle balance beyond the reserve. The Scholar should understand what is inside a money-market fund before parking meaningful cash in one.
- 01Distinguish government, prime, and municipal money-market funds.
- 02Explain the difference between the SEC 7-day yield and the distribution yield.
- 03Assess the credit quality of a fund's holdings from its fact sheet.
The three flavors
Government funds hold Treasuries and repos backed by Treasuries — lowest credit risk, often exempt from state income tax on the Treasury portion. Prime funds hold commercial paper and other short-term corporate debt — slightly higher yield, slightly higher risk. Municipal funds hold short-term municipal debt — tax-advantaged for high-bracket investors.
The yield to look at
The SEC 7-day yield is the standardized measure. It is annualized from the last seven days of income, net of fees. Compare funds on that number, not on the trailing 12-month distribution.
The one thing to watch
The Reserve Primary Fund broke the buck in 2008 during the Lehman failure. Since then, regulatory reforms have made a repeat much less likely, but the point stands: a money-market fund is not a bank deposit. In a stressed environment, a government money-market fund is meaningfully safer than a prime one.
- SEC 7-day yield is the comparable metric.
- Government funds are the default for household idle cash.
- A money-market fund is a security, not a deposit.