What is a money market fund and how do they work? | Vanguard (2024)

Put your cash to work

Money market funds can be a great alternative to bank accounts or CDs (certificates of deposit). They generally combine good yields, easy access to your money, and low risk.

Money market funds are typically used to hold:

• Money you'll need soon, whether it's for an upcoming purchase or part of a spending fund.
• 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 much higher yield than traditional bank savings accounts.* 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.

Learn more about types of cash investments

How do money market funds work?

Money market funds invest in very-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 share.** That means your account value shouldn't change other than any growth from your earnings—these funds are intended not to lose money.

While all money market funds have the same share price, their yields will vary. To see what a money market fund is currently paying, look at the 7-day yield. 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).

What are the types of money market funds?

Taxable vs. tax-exempt funds

Taxable money market funds usually offer higher yields than tax-exempt funds, but any income is subject to taxes.

Tax-exempt funds (commonly called "muni" 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 funds invest only in assets that are 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.

One other difference is that retail funds are required to follow SEC rules regarding liquidity fees and gates during times of extreme market stress.† These rules can mean you'd have to pay a fee or could temporarily be unable to withdraw money if a lot of investors sell shares all at once.

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

As we've seen, 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 bank savings.

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

Insurance coverage. 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.