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Understanding investment types

What are money market funds and how do they work?

Money market funds can give you the opportunity to get a better return on your cash, including your emergency fund, money sitting in a savings account, or a spending fund.
5 minute read

What is a money market fund?

Money market funds are a type of mutual fund that invests in low-risk, short-term debt securities, such as Treasury bills, municipal debt, or corporate bonds. They're designed to offer a safe, stable investment option for money you may need to access in the short term, like an emergency fund or a short-term goal.

Money market funds are different from money market accounts in a few important respects. While both offer low-risk ways to save money and earn modest returns, money market accounts are typically offered by banks and credit unions, and as deposit accounts, they're insured by the FDIC, the federal agency that insures bank deposits in the U.S. Money market funds are an investment product, so you need a brokerage account to get started. They can be a valuable tool for diversifying your portfolio, allowing you to earn interest on your savings while helping reduce market risk.

Put your cash to work

Money market funds can be a sound alternative to traditional bank accounts or certificates of deposit (CDs). Relative to these products, they generally combine competitive yields, along with easy access to your money and low risk.

Money market funds are typically used to hold:

  1. Money you'll need soon, whether it's for an upcoming purchase or part of a spending fund.
  2. Money that's part of an emergency fund—i.e., you have no plans to spend it, but it needs to remain safe and accessible.

Money market funds generally pay a higher yield than traditional bank savings accounts. 1 And it's easy to withdraw money from a money market fund without the fees or penalties you might pay with a CD.

Money market funds are also used as settlement funds—the account holding the money used to buy and sell—in brokerage accounts. At Vanguard, we use Vanguard Federal Money Market Fund (VMFXX) for one option of our settlement funds.

Learn more about types of cash investments

Money market mutual funds

Money market mutual funds are one of the most conservative places to keep your cash.

Settlement fund

This holds the money you use to buy securities, as well as the proceeds whenever you sell.

Understanding liquidity fees & gates

Liquidity fees and gates are tools to help money market fund managers keep the funds stable during times of extreme market duress. Under the rules:

  • A fund may impose a fee of up to 2% on redemptions if a fund's weekly liquid assets fall below 30% of its total assets.
  • A fund must impose a 1% fee on redemptions (with the option of imposing a fee of up to 2%) if a fund's weekly liquid assets fall below 10% of its total assets—unless the fund's board determines a fee wouldn't be in the fund's best interest.
  • A fund may impose a gate—that is, suspend redemptions—for up to 10 business days in a 90-day period.

The fees and gates rules only apply to retail and institutional funds, although government funds may voluntarily adopt them if the fees and gates are previously disclosed to investors.

The boards of directors of Vanguard's government funds have decided to impose neither fees nor gates.

Certificate of Deposit (CD)

An insured, interest-bearing deposit at a bank that requires the depositor to keep the money invested for a specific period of time. CDs can be traded on the secondary market.

Bond

A debt security (IOU) issued by a corporation, government, or government agency in exchange for the money the bondholder lends it. In most instances, the issuer agrees to pay back the loan by a specific date and make regular interest payments until that date.

Net Asset Value (NAV)

The market value of a mutual fund's total assets, minus liabilities, divided by the number of shares outstanding. The value of a single share is called its share value or share price.

WHY INVEST IN CASH?

Cash investments are designed to offer a low-risk option for investing existing funds, and they may help maximize your savings potential.

Discover your options

How do money market funds work?

Money market funds invest in low-risk assets like Treasury bonds, CDs, or short-term, high-quality corporate bonds with maturities of less than a year.

Unlike stock or bond funds, they have a fixed price of $1 per share2 —and money market funds aim to maintain their Net asset value (NAV). That means your account value shouldn't change other than any growth from your earnings.

While all money market funds have the same share price, their yields vary. To see what a money market fund is currently paying, look at the 7-day yield.3 This calculation is used to measure a fund’s annualized yield. It gives you an idea of the return you can expect over the next year, based on the average payouts made in a week. This makes it helpful for comparing different money market funds.

For example, a $10,000 investment in a money market fund with a 5% SEC yield would earn $500 on an annual basis (10,000 x 0.05). Details vary by fund and fund provider, but money market funds typically pay distributions monthly.

What are the types of money market funds?

Taxable vs. tax-exempt funds

Taxable money market funds, also known as prime money market funds, usually offer higher yields than tax-exempt funds, but any income is subject to taxes. Prime funds invest in corporate and bank debt issued by U.S. and international entities.

Tax-exempt funds (commonly called "munis" or "municipal" funds) usually don't pay as much, but their earnings are federally tax-free, so they can be a better option for investors in a high tax bracket.

Some tax-exempt funds invest only in bonds issued by a specific state, which makes them both federal and state tax-free for residents of that state.

Find out if tax-exempt mutual funds are right for you

See a list of Vanguard tax-exempt money market funds

Government vs. retail funds

Government money market funds invest only in assets backed by the federal government—for example, Treasury bonds. Because of this government backing, they're considered the safest and most liquid type of money market fund. They often include the words "government fund," "Treasury fund," or "federal fund" in their name.

Retail funds can invest in other types of assets, like municipal bonds or short-term, high-quality corporate bonds. They're sometimes called "prime" funds.

In addition, retail funds are required to follow SEC rules about liquidity fees and gates during times of extreme market stress.4 These rules can mean you'd have to pay a fee or could be temporarily unable to withdraw money if a lot of investors sell shares at the same time.

Government funds are allowed to follow these rules but aren't required to. (Vanguard's government funds don't have fees or gates.)

See a complete list of Vanguard money market funds

Pros and cons of money market funds

Money market funds are meant to be:

  • Safe. They're intended not to lose value.
  • Liquid. You can withdraw your cash at any time without penalties.
  • Higher-yielding than savings at traditional banks.

However, depending on what's important to you, you'll need to keep these points in mind:

Insurance coverage. Traditional bank savings accounts and CDs are FDIC-insured up to $250,000. Money market funds aren't insured by the FDIC. Instead, they may be eligible for $500,000 coverage under SIPC when held in a brokerage account.

Accessibility. Because they're mutual funds, money market fund sales are processed like sales of other mutual funds—the trade is processed at the close of business following your trade request, and the money then takes 2 business days to transfer to your bank account. Bottom line, you'll need to allow time for money movement.

All Vanguard money market funds outperformed peer-group averages over every time period.5

Shop money markets

Frequently asked questions about money market funds

Money market funds are intended to be as safe as possible, but like all investments, they're not risk-free. The price of a money market fund share has dropped below $1 only twice in history, and that was before additional regulations were put into place in 2016 to make them even safer. (Both of these funds were prime funds.)

Of all types of money market funds, government funds can be considered the safest. At least 99.5% of their assets are backed by the full faith and credit of the U.S. government.

While money market funds aren't FDIC-insured, investments held in brokerage accounts (including money market funds) may be insured by SIPC. Unlike FDIC coverage, SIPC coverage doesn't insure the value of your investment—it protects you if your broker fails.

The earnings from money market funds can come from interest income or capital gains, so they're taxed the same way as other investment income.

Money market funds generally have higher yields than bank savings accounts. But savings accounts may have features like overdraft protection. 

Money market accounts are bank accounts that invest in assets like those in money market funds. They have different insurance coverage and may have different fees, withdrawal restrictions, yields, minimums, and features.

1Traditional bank savings accounts calculate interest using annual percentage yield (APY), while money market funds use the 7-day SEC yield formula. APY is the real rate of return earned on an investment, considering the effect of compounding interest. Compounding interest is calculated periodically, and the amount is almost immediately added to the balance. 7-day SEC yield is calculated based on the fund's average 7-day distribution and allows for comparison across many money market products. This yield includes distributions paid by the fund plus any appreciation over a 7-day period, minus average fees within 7 days.

2In 2016, the SEC began requiring institutional money market funds to have a floating share price like stock or bond funds. Institutional money market funds are intended for institutional investors, and Vanguard doesn't offer them to retail investors.

37-day SEC yield is calculated based on the fund's average 7-day distribution and allows for comparison across many money market products. This yield includes distributions paid by the fund plus any appreciation over a 7-day period, minus average fees incurred during 7 days.

4Recently instituted money market requirements will do away with gates and adjust when and how fees are applied. While rules aren't yet in effect, the rule amendments will become effective 60 days after publication in the Federal Register with a tiered transition period for funds to comply with the amendments. For more information, see the SEC press release regarding money market fund reforms and amendments.

 5For the quarter-end, year-to-date, 1-year, 3-year, 5-year, and 10-year periods ended September 30, 2024, 6 of 6 Vanguard money market funds, 70 of 83 Vanguard bond funds, 21 of 23 Vanguard balanced funds, and 121 of 137 Vanguard stock funds—for a total of 218 of 249 Vanguard funds—outperformed their Lipper peer-group averages. Only mutual funds and ETFs (exchange-traded funds) with a minimum quarter-, 1-, 3-, 5-, or 10-year history, respectively, were included in the comparison. Source: Lipper, a Thomson Reuters Company. The competitive performance data shown represent past performance, which is not a guarantee of future results. View fund performance
 

For more information about Vanguard funds or ETFs, visit vanguard.com to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information about a fund are contained in the prospectus; read and consider it carefully before investing.

You could lose money by investing in the Fund. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it cannot guarantee it will do so. An investment in the Fund is not a bank account and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The Fund’s sponsor is not required to reimburse the Fund for losses, and you should not expect that the sponsor will provide financial support to the Fund at any time, including during periods of market stress.

Bank deposits and CDs are guaranteed (within limits) as to principal and interest by an agency of the federal government.

Bank accounts can offer more liquidity, ATM access, and overdraft protection. You should consider all material differences before choosing to invest.

All investing is subject to risk, including the possible loss of the money you invest.

While U.S. Treasury or government agency securities provide substantial protection against credit risk, they do not protect investors against price changes due to changing interest rates. Unlike stocks and bonds, U.S. Treasury bills are guaranteed as to the timely payment of principal and interest.

There may be other material differences between products that must be considered prior to investing.

Although the income from a municipal bond fund is exempt from federal tax, you may owe taxes on any capital gains realized through the fund's trading or through your own redemption of shares. For some investors, a portion of the fund's income may be subject to state and local taxes, as well as to the federal alternative minimum tax.