Money market funds are where a large share of America's spare cash sits: US funds held $7.90 trillion in the week ended October 28, 2026, according to the Investment Company Institute. They behave a lot like bank accounts, with a share price that usually stays at $1.00 and a yield that follows short-term interest rates, yet they are mutual funds governed by securities law rather than deposits. This guide covers the SEC rules behind them, the fund types, the 7-day yield and the risks. For the wider menu of low-risk places to keep cash, start at the safe investments hub.
What is a money market fund?
A money market fund is a mutual fund limited to short-term, high-quality debt, run under the SEC's Rule 2a-7 on maturity, credit quality, diversification and liquidity.
Depending on its type, the fund buys Treasury bills, repurchase agreements, bank CDs, commercial paper or municipal notes, and passes the interest, minus expenses, to shareholders as dividends. Shares trade at the fund's net asset value.
The label is regulated: only a fund that meets Rule 2a-7 may call itself a money market fund or use names such as "cash" or "liquid". Every stable-price fund's prospectus must also carry the warning set by SEC Form N-1A: "You could lose money by investing in the Fund."
In the week ended October 28, 2026, government funds held $6.50 trillion, prime funds $1.24 trillion and tax-exempt funds $0.16 trillion, so roughly 82 cents of every money market dollar sat in government funds.
What does SEC Rule 2a-7 require?
Rule 2a-7 keeps a fund's holdings short, liquid, diversified and low in credit risk, so its value barely moves from day to day.
| Requirement | Limit under Rule 2a-7 |
|---|---|
| Final maturity of any one security | 397 calendar days or less |
| Weighted average maturity of the portfolio | 60 days or less |
| Weighted average life (no credit for rate resets) | 120 days or less |
| Credit quality | Board must find minimal credit risk |
| Exposure to one issuer (taxable funds) | Generally no more than 5% of total assets |
| Exposure to one guarantor or demand-feature provider | Generally no more than 10% of total assets |
| Illiquid securities | No more than 5% of total assets |
| Daily liquid assets | At least 25% of total assets (not required of tax-exempt funds) |
| Weekly liquid assets | At least 50% of total assets |
Daily liquid assets are cash, direct US government obligations and securities that pay out within one business day; weekly liquid assets stretch that window to five business days. The rule therefore requires at least 25% of total assets in daily liquid assets and at least 50% in weekly liquid assets, so half of a typical portfolio can turn into cash within a week.
The short maturities explain why fund yields track Treasury bill rates so closely: when the Federal Reserve moves its target, fund yields follow within weeks, as the guide to Fed decisions and bill rates shows.
How did the 2023 SEC reforms change money market funds?
The SEC's July 2023 amendments removed redemption gates, cut the link between liquidity levels and fees, raised liquidity minimums and made some funds charge liquidity fees.
The changes, adopted on July 12, 2023, arrived in stages:
- October 2, 2023: funds lost the power to temporarily suspend redemptions, known as gates, and fees stopped depending on weekly liquid assets falling below a threshold.
- April 2, 2024: the daily and weekly liquidity minimums rose to 25% and 50%, from 10% and 30%, and the new discretionary fee rules applied.
- October 2, 2024: institutional prime and institutional tax-exempt funds had to start charging mandatory liquidity fees.
A mandatory fee applies on any day when net redemptions exceed 5% of a fund's net assets, unless the cost is de minimis (under 0.01% of the value redeemed). It equals the fund's good-faith estimate of its selling costs, or 1% if no estimate can be made. Any non-government fund must also charge a discretionary fee of up to 2% when its board decides that is in the fund's best interest; government funds may opt in.
Worked example: A mandatory liquidity fee on a heavy redemption day
An institutional prime fund has $10 billion in net assets. On one day, investors pull out a net $650 million.
- Net redemptions: $650 million ÷ $10 billion = 6.5%, above the 5% trigger, so a fee applies
- Suppose the fund estimates its selling costs at 0.12% (an illustrative figure)
- A $5,000,000 redemption pays $5,000,000 × 0.0012 = $6,000
- If the fund cannot make a good-faith estimate, the 1% default applies: $5,000,000 × 0.01 = $50,000
Retail and government funds are not subject to this mandatory fee.
What are the types of money market funds?
There are three main types, government, prime and tax-exempt, and the prime and tax-exempt types come in retail and institutional versions with different pricing and fee rules.
| Fund type | What it holds | Share price | Liquidity fees | Assets, week ended Oct 28, 2026 |
|---|---|---|---|---|
| Government | 99.5% or more in cash, government securities and fully collateralized repos | Stable $1.00 allowed | None required; board may opt in | $6.50 trillion |
| Retail prime | Commercial paper and bank CDs; individuals only | Stable $1.00 allowed | Discretionary, up to 2% | $0.98 trillion |
| Institutional prime | The same debt; open to businesses | Floats to four decimals | Mandatory above 5% daily net redemptions, plus discretionary | $0.25 trillion |
| Retail tax-exempt | Municipal notes; individuals only | Stable $1.00 allowed | Discretionary, up to 2% | $0.15 trillion |
| Institutional tax-exempt | Municipal notes; open to businesses | Floats to four decimals | Mandatory and discretionary | $0.02 trillion |
Government funds dominate because they pair a stable price with no required fees. Prime funds accept bank and corporate credit risk, usually for a slightly higher yield. Tax-exempt funds pay interest that is generally free of federal income tax, though part of it can count toward the alternative minimum tax.
Worked example: Is a 2.80% tax-exempt fund worth more than a taxable one?
Divide the tax-exempt yield by one minus your federal tax rate to get the taxable yield it matches.
- In the 32% bracket: 2.80% ÷ (1 − 0.32) = 4.12%
- In the 24% bracket: 2.80% ÷ (1 − 0.24) = 3.68%
A taxable fund quoting 3.90% wins for the 24% taxpayer and loses for the 32% taxpayer. State taxes and the alternative minimum tax can change the answer.
How does a money market fund keep a $1.00 share price?
Government and retail funds may price holdings at amortized cost and round to the nearest cent, which keeps shares at $1.00 unless losses top half a cent.
Amortized cost values each security at what the fund paid, adjusted steadily toward its face value as it nears maturity, rather than at its market price each day. Funds still track the market value of their holdings, and if that value per share drops below $0.995, rounding gives $0.99 and the fund has "broken the buck".
Worked example: When a loss breaks the buck
A fund has $2,000,000,000 in assets and 2,000,000,000 shares, so each share is backed by $1.0000.
- $8,000,000 loss (0.40% of assets): $1,992,000,000 ÷ 2,000,000,000 = $0.9960, which rounds to $1.00
- $10,000,000 loss (0.50%): $0.9950, still $1.00 after rounding
- $12,000,000 loss (0.60%): $0.9940, which rounds to $0.99, and the fund has broken the buck
Under the 5% single-issuer limit this fund could hold $100,000,000 of one company's paper, so losing an eighth of that position, $12,500,000, would be enough.
Institutional prime and tax-exempt funds skip the rounding. They price to four decimals, so a share might be worth $1.0003 one day and $1.0001 the next, and a sale can produce a small gain or loss.
What happened when the Reserve Primary Fund broke the buck?
On September 16, 2008, the Reserve Primary Fund's share price fell below $1.00 after Lehman Brothers' bankruptcy hit the $785 million of Lehman debt it held.
The Lehman paper was only about 1.2% of the fund's roughly $62.4 billion in assets, but any loss beyond half a cent per share was enough. Redemption requests passed $40 billion within two days. The fund's share price fell to $0.97, and an SEC order let it suspend redemptions while it wound down. It was only the second registered money market fund to break the buck; the first was in 1994.
Getting the money back took years. By early 2010 investors had received more than 98 cents on the dollar, according to the SEC, and the final distribution in December 2014 brought the total to about 99.1 cents. In 2009 the SEC charged the fund's operators with fraud.
The run spread to other funds. On September 19, 2008, the Treasury announced a temporary guarantee program for money market funds that did not cover the Reserve Primary Fund; it expired a year later with no losses and about $1.2 billion in fees collected. The episode is the main reason the SEC has tightened Rule 2a-7 several times since.
How is the 7-day SEC yield calculated?
The 7-day SEC yield takes one share's net income over the past seven days, divides it by the starting share price and multiplies by 365 ÷ 7.
7-day yield = (net income per share over 7 days ÷ share value at the start) × (365 ÷ 7)
Form N-1A sets the method: income on a hypothetical one-share account, excluding gains, losses and changes in value, after the fees charged to all accounts, rounded to the nearest hundredth of a percent. Funds may also quote an effective yield, which assumes the week's income is reinvested every week for a year:
Effective yield = (1 + base-period return) ^ (365 ÷ 7) − 1
Worked example: Turning one week of income into a quoted yield
A share worth $1.00 earns $0.000752 after expenses over seven days.
- Base-period return: $0.000752 ÷ $1.00 = 0.0752%
- 7-day yield: 0.0752% × 52.142857 = 3.92%
- Effective yield: 1.000752 ^ 52.142857 − 1 = 4.00%
- On $20,000, a year at that pace pays about $784 without compounding, or about $799.50 with weekly reinvestment
The 7-day yield looks backward and changes daily, so treat it as a snapshot. Compare it with a bill's investment yield, not its discount rate; the discount rate vs investment rate guide explains the gap and the Treasury bill calculator does the conversion. A bank's APY corresponds to the effective yield, as the APY vs APR guide shows.
How much do expenses take from a money market fund's yield?
Expenses are deducted from income before the yield is quoted, so every 0.10 percentage point of expense ratio comes straight off what shareholders earn.
Funds of the same type hold similar paper, so the expense ratio, shown in the fee table of the summary prospectus, explains much of the gap between their yields. Some sponsors waive part of their fee, and a waiver can end.
Worked example: Fee drag on $50,000 over five years
Two government funds each earn 4.10% a year before expenses. One charges 0.10%, the other 0.45%.
- Net yields: 4.10% − 0.10% = 4.00% and 4.10% − 0.45% = 3.65%
- After five years with dividends reinvested: $50,000 × 1.04 ^ 5 = $60,832.65 and $50,000 × 1.0365 ^ 5 = $59,815.89
- The higher-cost fund leaves you $1,016.76 behind, before tax
The compound interest calculator runs the same comparison for other balances, rates and time spans.
How do money market funds compare with T-bills and bank accounts?
They sit between the two: yields close to Treasury bills with access much like a bank account, but without FDIC insurance or a direct US government guarantee.
A Treasury bill is backed by the full faith and credit of the US government; a government fund owns bills and repos, but its shares are guaranteed by no one. T-bills vs money market funds sets out the tax and convenience trade-offs. A money market deposit account, despite the similar name, is an insured bank deposit, compared line by line in money market fund vs money market account, and cash sweep accounts explains whether a brokerage parks your idle cash in a fund or at a bank.
Government funds also sit behind some digital dollars. At the end of 2025, Circle, the issuer of USDC, held about 88% of its reserves in a government money market fund, according to its annual report. Our stablecoin data page tracks how the largest coins are backed, stablecoin yield vs bank interest covers what holders can earn, and on-chain Treasury bills are a related idea.
What are the risks of a money market fund?
The main risks are a drop below $1.00, liquidity fees when many investors leave at once, and yields that fall quickly when the Fed cuts rates.
- No deposit insurance. The FDIC lists money market mutual funds among the products it does not insure, even when sold at a bank. If a brokerage fails and your shares go missing, SIPC protects up to $500,000 per customer, including up to $250,000 in cash, but it does not cover a fall in the fund's value; FDIC vs SIPC explains the split.
- No sponsor backstop. The prospectus must say the sponsor is not required to reimburse the fund for losses, so any support would be voluntary.
- Credit risk in prime and tax-exempt funds. A default by a bank, company or municipal borrower can push a share below $1.00, as Lehman's did in 2008. Government funds carry far less credit risk.
- Liquidity fees and frozen money. Heavy redemption days can trigger fees, and a liquidating fund can suspend redemptions while it sells assets, which left Reserve Primary investors waiting until 2014 for their last payment.
- Falling yields and inflation. Yields reset within weeks when rates fall, and after inflation and tax a fund can lose purchasing power, as the real rate of return guide shows.
- Negative rates. If short-term rates drop below zero, Rule 2a-7 lets a stable-price fund cancel shares to hold its $1.00 price, so your share count could shrink.
For how these hazards fit alongside inflation, interest-rate and liquidity risk elsewhere in a portfolio, see types of investment risk.