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A money market fund is a kind of mutual fund which invests only in highly liquid cash and cash equivalent securities that have high credit ratings. While all features of a standard mutual fund apply to a money market fund, there is one key difference. It forces the fund managers to make regular payments to the fund investors which acts as a regular flow of income for the investors. It also allows easy calculations and tracking of the net gains generated from the fund. 1 NAV model to a floating NAV model for the money market funds, the agency was forced to withdraw the proposal as it could not garner the necessary support from the industry and from other involved entities. 1 NAV, a condition which is described by the term breaking the buck.
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Regulators jump in when a money market mutual fund breaks the buck, and forces its liquidation. Year 1994 saw the first instance of a money market fund breaking the buck, when Community Bankers U. Government Money Market Fund was liquidated at 94 cents owing to the large losses it incurred in derivatives. However, there have been only a handful of cases of breaking the buck. To avoid any similar future occurrences, SEC issued new rules after the 2008 crisis to better manage money market funds and provide more stability and resilience. Returns from these instruments are dependent on the applicable interest rates, and therefore the overall returns from the money market funds are also dependent on the interest rates. Money market funds are classified into various types depending upon the class of invested assets, maturity period, and other attributes.
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A Prime money fund invests in floating-rate debt and commercial paper of non-treasury assets, like those issued by corporations and securities of the US government and agencies. A Government money fund invests at least 99. A Treasury fund is a type of government money fund that invests in standard U. US Treasury Bills, Bonds and Notes.
A Tax-exempt money fund offers exemption from U. Municipal debt securities primarily constitute such types of money market funds. Depending upon the target client base, Institutional money fund which are targeted to attract institutional money with high minimum investment amount, and Retail money fund which are offered to individual investors with small investment amount, are also popular. Money market funds were designed and launched during the early 1970s in the U. They gained rapid popularity as an easy medium for investors to purchase a pool of securities which generally offered better returns than those available from a standard interest-bearing bank account.
Many investors use money market funds for managing their cash and for other funding needs that may arise in the short term. SEC which defines the necessary guidelines for the characteristics, maturity and variety of the instruments in which a money market fund can invest in. Under the provisions, a money fund mainly invests in the top rated debt instruments, and they should have maturity period under 13 months. A money market fund is not allowed to invest more than 5 percent in any one issuer to avoid issuer specific risk. However, government issued securities and repurchase agreements are exempted from this 5 percent limit as they are considered risk-free. The interest rates available on the various instruments constituting the portfolio are the key factors that determine the return from the money market funds.
Historical instances provide sufficient details on how money market returns have fared. The primary purpose of a money market fund is to provide investors a safe medium through which they can invest in easily accessible, secure, and highly liquid cash-equivalent debt-based assets using smaller investment amounts. It is a type of mutual fund characterized as a low-risk, low-return investment. Owing to the low returns, investors may prefer parking their money for short term in such funds. However, these funds are not covered by federal deposit insurance, while other comparable investment options, like money market deposit accounts, online savings accounts and certificates of deposit, are covered. Money market funds are considered safe investments and are regulated under the Investment Company Act of 1940. An active investor who has time and knowledge to hunt around for the best possible short term debt instruments offering the best possible interest rates at his preferred levels of risk may prefer investing on his own in the various available instruments.