If you have money that you need to park for a short period but don't want to put in the bank, a money market fund might be a good place to invest it. These funds hold money market securities and are typically very safe and liquid, letting you invest and withdraw funds quickly and simply. However, because they're stable and secure, money market securities offer a relatively low return on the money you invest in them. As an example, in November 2013, the average money market fund offered a return of 0.02 percent.
Money market securities are short-term investments that are highly secure and liquid. According to the Richmond Federal Reserve Bank, money market securities typically come in blocks of at least $1 million and have maturities that can be any where from one day to a year. Most have a life of 90 or fewer days, though. They can be issued by governments or private entities. Thanks to the existence of money market funds, you can buy an investment in money market securities for much less than $1 million.
Treasury bills are popular money market instruments. They are short-term securities issued by the U.S. Treasury and backed by the federal government. Treasury bills come in four-, 13-, 26- and 52-week maturities, with the two shortest being especially appropriate as money market securities. The Treasury also periodically sells cash management bills that can have even shorter lives. As an example, between February and October 2013, the Treasury held 11 separate auctions of these bills with terms ranging from five to 189 days.
Bank and Commercial Securities
Money market securities also include privately issued investments. Bankers' acceptances -- promises from banks to pay money in the future that are typically used in international trade -- are considered money market securities, as are certificates of deposit with shorter terms. In addition, some large companies offer commercial paper. Commercial paper is like a corporate bond, but is also very short term.
Buying Into Money Markets
With the exception of Treasury bills, you generally aren't going to be buying money market securities for yourself. However, you can buy shares in money market funds that hold them. By law, money market funds can only hold investments that have a maturity of 13 or fewer months; 10 percent of the fund's holdings must be in securities that mature overnight and 30 percent must be in securities maturing within a week, while the average maturity of everything the fund owns has to be 60 or fewer days. These rules are designed to ensure that a $1 investment in a money market fund maintains its $1 value, no matter what.
- Federal Reserve Bank of Richmond: Instruments of the Money Market
- TreasuryDirect: Treasury Bills
- TreasuryDirect: 2013 Treasury Securities Auction Press Releases -- Cash Management Bills (CMB)
- Financial Industry Regulatory Authority: Smart Bond Investing -- Money Market Securities
- Bankrate: Money Market Funds Safer With New Rules
- Wells Fargo: Wells Fargo Advantage Money Market Fund –- WMMXX
- Reuters: Financial Glossary -- Banker's Acceptance
- SEC. "Supplement to the Fidelity Government Money Market Fund, Fidelity Money Market Fund, Fidelity Treasury Money Market Fund, and Fidelity Treasury Only Money Market Fund." Accessed Oct. 10, 2020.
- ICI. "Re: IOSeO Money Market Fund Systemic Risk Analysis and Reform Options," Page 5. Accessed Oct. 10, 2020.
- U.S. Dept. of Treasury. "Report of the President’s Working Group on Financial Markets," Page 12. Accessed Oct. 10, 2020.
- SEC. "Disclosure of Mutual Fund Performance and Portfolio Managers," Page 5. Accessed Oct. 10, 2020.
- U.S. Dept. of Treasury. "Report of the President’s Working Group on Financial Markets," Page 15. Accessed Oct. 10, 2020.
- SEC. "Removal of Certain References to Credit Ratings and Amendment to the Issuer Diversification Requirement in the Money Market Fund Rule," Page 7. Accessed Oct. 10, 2020.
Steve Lander has been a writer since 1996, with experience in the fields of financial services, real estate and technology. His work has appeared in trade publications such as the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." Lander holds a Bachelor of Arts in political science from Columbia University.