Money funds (or money market funds, money market mutual funds) are mutual
funds that invest in short-term debt instruments.
Explanation
Money market funds, also known as principal stability funds, seek to limit exposure to losses due to credit, market, and
liquidity risks. Money market funds are regulated by the U.S. Securities and Exchange Commission's (SEC) Investment
Company Act of 1940. Rule 2a-7 of the 1940 act restricts investments in money market funds by quality, maturity and
diversity. Under this act a money fund mainly buys the highest rated debt which matures in under 13 months. The portfolio must
maintain a Weighted Average Maturity (WAM) of 90 days or less and invest up to 5% in any one issuer, with the exception of
government and repurchase agreement securities.
Money market funds seek a stable $1.00 Net Asset value (NAV). Since the 2a-7 rule has been adopted only one fund "broke the
buck" in 1994, paying investors $0.96 per share. The fund that failed was called the Community Bankers U.S. Government Fund and
it had invested a large percentage of its assets into adjustable rate securities. As interest rates increased, these floating
rate securities lost value.
Eligibile money market securities include commercial
paper, repurchase agreements, short-term bonds or other money funds. Money market securities must be highly liquid, and have a stable value.
Money market accounts
Banks in the United States offer savings and "money market deposit accounts", but these shouldn't be confused with money
market mutual funds. These bank accounts offer higher yields than traditional passbook savings accounts, but often with higher
minimum balance requirements and limited transactions. A money market account may refer to a money market mutual fund, a bank
money market deposit account (MMDA) or a brokerage sweep free credit balance.
History
In 1971, Bruce R. Bent established the first money market fund in the U.S. The Reserve Fund was offered to investors who were interested in
preserving their cash and earning a small rate of return. Today, almost 2,000 money funds are in operation, with total
assets of over $2.3 trillion dollars.
Outside of the U.S., the first money market fund was set up in 1968 and was designed for small investors. The fund was called
Conta
Garantia and was created by John Oswin Schroy. The fund's investments included low denominations of commercial paper.
Institutional money fund
Institutional money funds are high minimum investment, low expense share classes which are marketed to corporations,
governments, or fiduciaries. They are often set up so that money is swept to them overnight from a company's main operating
accounts. Large national chains often have many accounts with banks all across the country, but electronically pull a majority of
funds on deposit with them to a concentrated money market fund.
The largest institutional money fund is the JPMorgan Prime Money Market Fund, with almost $100 billion in assets as of Dec.
31, 2006. Among the largest companies offering institutional money funds are BlackRock, Federated, Columbia (Bank of America),
Dreyfus, AIM and Evergreen (Wachovia).
Retail money funds
Retail money funds are offered primarily to individuals with moderate-sized accounts. Their primary use is as temporary
holding funds at stock brokerage firms. Retail money market funds hold roughly 40% of all money market fund assets.
Retail money funds invest in short-term debt, such as US Treasury bills and commercial paper, come in a few
different breeds: government-only funds, non-government funds and
tax-free funds. You will get a slightly higher yield in the non-government variety, which will
invest in high-quality commercial paper and other instruments. Money funds for individuals are currently yielding just over 5.0%.
However, instruments of the United States Government are usually exempt from state income taxes.
The largest money market mutual fund is Fidelity Investments' Cash Reserves
(FDRXX), with assets exceeding $88 billion. The largest retail money fund providers include: Fidelity, Vanguard, and Schwab.
See also
External links
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