History

• In 1971 the Reserve Fund's Primary Fund opened as the first money market fund. Since then, only two money market funds have had net asset values of less than $1, and depositors have never lost money deposited in a fund.
  
  

Function

• These funds are seen as alternatives to savings accounts and usually pay slightly higher rates. Unlike savings accounts at a bank, they are not insured by the Federal Deposit Insurance Corp.
  
  

Features

• Some money market funds charge fees, and others can sweep money back and forth from checking accounts. All are designed to maintain a net asset value of $1. Although expressed as an interest rate yield, payments are in the form of dividends and roll over within the fund unless a payout is selected.
  
  

Significance

• Investors who need to hold large amounts of money in a cash-equivalent form, and who prefer a highly safe investment, use money market funds because they pay higher returns than bank savings accounts and Treasury bills. Deposits can be held in the fund overnight or for as long as needed.
  
  

Considerations

• The larger the fund, the more likely it will be able to cover any investment failures or to make up any losses internally, rather than passing them through to the investors.
  
  

Misconceptions

• Although money market mutual funds are not insured by the FDIC, they may invest in FDIC-insured CDs and government-guaranteed U.S. Treasury securities. Except for periods of economic crisis, money market funds are not government-guaranteed.