Money market funds are “cash instrument” based mutual funds. They buy into extremely short term commercial paper markets, which are used to fund overnight loans that mature extremely quickly. They also buy into certificates of deposit, ultra-short term debt instruments, and repurchase agreements. The securities in the fund last from a few days to a few months.

Due to their quick maturities and rapid repayments, Money Market Funds usually carry very low risks. Since most of these investments function as cash equivalents they are similar to cash accounts. Money market funds themselves are often used as cash equivalents, frequently allowing investors to use checking or withdrawals against their money market fund. This withdrawal or checking is typically controlled, requiring a minimum value to withdraw funding. These funds usually have a moderately sized or constantly refilling redemption pool, since almost all investments are constantly close to cash.

Many investors make deposits into these funds. You should be warned that money market funds are not principal safe. Even though they are considered as safe as savings accounts be aware that principal loss may occur.  They are not insured by the federal deposit insurance corporation.

Finally, the management teams that control and operate these funds may attempt to keep the net asset value fixed. They avoid capital gains and losses, alongside all of their side effects, including capital gains taxes. You may incur taxation based on distributions or dividends to shareholders of the fund. If executed correctly, they reduce taxation.

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