A money market fund is an investment fund comprising a portfolio of high-quality, short-term securities, such as treasury bills and commercial paper, and that pays dividends that normally reflect short-term interest rates.
As with bond funds, money market funds are classified by their principal underlying assets:
- Government money market fund – A money market fund that invests 99.5% or more of its total assets in cash, government securities, and/or repurchase agreements that are fully collateralized by government securities or cash;
- Tax-exempt money market fund – A money fund comprised of the short-term debt securities of state and local jurisdictions (municipal notes), which are usually exempt from US federal income tax and the income tax of the state of issue; and
- Prime money market fund – A fund that invests mainly in high-quality commercial paper, certificates of deposit and short-term government, agency and municipal securities.
Money market funds are also characterized by the nature of investor they are targeted to:
- Retail money market fund – A money fund offered primarily to retail investors, with policies and procedures designed in the interest of such investors; and
- Institutional money market fund – A money market fund requiring a high minimum investment and marketed to corporations, governments and financial fiduciaries, commonly set up to automatically pool idle cash from the main operating accounts of the institutional investors and to transfer (“sweep”) the cash to the fund overnight.