What is a money market fund and how do they work? | Vanguard (2024)

1Traditional bank savings accounts calculate interest using annual percentage yield (APY), while money market funds use the 7-day SEC yield formula. APY is the real rate of return earned on an investment, considering the effect of compounding interest. Compounding interest is calculated periodically, and the amount is almost immediately added to the balance. 7-day SEC yield is calculated based on the fund's average 7-day distribution and allows for comparison across many money market products. This yield includes distributions paid by the fund plus any appreciation over a 7-day period, minus average fees within 7 days.

2In 2016, the SEC began requiring institutional money market funds to have a floating share price like stock or bond funds. Institutional money market funds are intended for institutional investors, and Vanguard doesn't offer them to retail investors.

37-day SEC yield is calculated based on the fund's average 7-day distribution and allows for comparison across many money market products. This yield includes distributions paid by the fund plus any appreciation over a 7-day period, minus average fees incurred during 7 days.

4Recently instituted money market requirements will do away with gates and adjust when and how fees are applied. While rules aren't yet in effect, the rule amendments will become effective 60 days after publication in the Federal Register with a tiered transition period for funds to comply with the amendments. For more information, see the SEC press release regarding money market fund reforms and amendments.

5For the quarter-end, year-to-date, 1-year, 3-year, 5-year, and 10-year periods ended December 31, 2023, 6 of 6 Vanguard money market funds, 70 of 83 Vanguard bond funds, 21 of 23 Vanguard balanced funds, and 124 of 136 Vanguard stock funds—for a total of 221 of 248 Vanguard funds—outperformed their Lipper peer-group averages. Only mutual funds and ETFs (exchange-traded funds) with a minimum quarter-, 1-, 3-, 5-, or 10-year history, respectively, were included in the comparison. Source: Lipper, a Thomson Reuters Company. The competitive performance data shown represent past performance, which is not a guarantee of future results.View fund performance

For more information about Vanguard funds or ETFs, visit vanguard.com to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information about a fund are contained in the prospectus; read and consider it carefully before investing.

You could lose money by investing in the Fund. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it cannot guarantee it will do so. An investment in the Fund is not a bank account and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The Fund’s sponsor is not required to reimburse the Fund for losses, and you should not expect that the sponsor will provide financial support to the Fund at any time, including during periods of market stress.

Bank deposits and CDs are guaranteed (within limits) as to principal and interest by an agency of the federal government.

Bank accounts can offer more liquidity, ATM access, and overdraft protection. You should consider all material differences before choosing to invest.

All investing is subject to risk, including the possible loss of the money you invest.

While U.S. Treasury or government agency securities provide substantial protection against credit risk, they do not protect investors against price changes due to changing interest rates. Unlike stocks and bonds, U.S. Treasury bills are guaranteed as to the timely payment of principal and interest.

There may be other material differences between products that must be considered prior to investing.

Although the income from a municipal bond fund is exempt from federal tax, you may owe taxes on any capital gains realized through the fund's trading or through your own redemption of shares. For some investors, a portion of the fund's income may be subject to state and local taxes, as well as to the federal alternative minimum tax.

What is a money market fund and how do they work? | Vanguard (2024)

FAQs

What is a money market fund and how do they work? | Vanguard? ›

Money market funds invest in low-risk assets like Treasury bonds, CDs, or short-term, high-quality corporate bonds with maturities of less than a year. Unlike stock or bond funds, they have a fixed price of $1 per share2 —and money market funds aim to maintain their Net asset value (NAV).

What are two disadvantages of a money market fund? ›

Some disadvantages are low returns, a loss of purchasing power, and the lack of FDIC insurance. A money market fund can be ideal in some situations and potentially unwise in others. If you're close to or in retirement and need some of your money soon, a money market fund can make sense.

How do you make money with a money market fund? ›

Like other mutual funds, money market funds sell shares to investors who can then earn income from the portfolios. MMFs blend highly-rated, short-term securities with longer-dated securities (up to 397 days for most funds).

Is money market fund a good investment? ›

Money market funds can be a good fit for investors looking to benefit from the current interest rate environment or saving for a short-term goal. Keep in mind that while the funds are considered low risk, they are not FDIC-insured.

How are money market funds paid out? ›

A money market fund aims to maintain a net asset value (NAV) of $1 per share.4 Any excess earnings that get generated through interest on the portfolio holdings are distributed to the investors in the form of dividend payments.

Can money market funds lose value? ›

All investments are subject to market risk, including possible loss of principal. Retail Money Market Funds: You could lose money by investing in the Fund. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it cannot guarantee it will do so.

Are money market funds safe in a recession? ›

Money market funds can protect your assets during a recession, but only as a temporary fix and not for long-term growth. In times of economic uncertainty, money market funds offer liquidity for cash reserves that can help you build your portfolio.

Do you pay taxes on money market accounts? ›

Taxable money market funds, also known as prime money market funds, usually offer higher yields than tax-exempt funds, but any income is subject to taxes. Prime funds invest in corporate and bank debt issued by U.S. and international entities.

How much money should I put in a money market fund? ›

Some money market accounts require minimum account balances for the higher rate of interest. Six to 12 months of living expenses are typically recommended for the amount of money that should be kept in cash in these types of accounts as emergency funds. Beyond that, not investing will mean missing potential earnings.

How do I cash out a money market fund? ›

Usually you can make unlimited withdrawals and payments by using an ATM or by making the withdrawal in person, by mail, or by telephone. A money market account might require a minimum amount to be deposited.

What is the highest paying money market fund? ›

7 Best Money Market Funds for 2024
FundExpense Ratio7-day SEC yield
Vanguard Treasury Money Market Fund (VUSXX)0.09%5.3%
Vanguard Municipal Money Market Fund (VMSXX)0.15%3.3%
Fidelity Money Market Fund (SPRXX)0.42%5.0%
Schwab Value Advantage Money Fund - Investor Shares (SWVXX)0.34%5.2%
3 more rows

What is the safest type of money market fund? ›

U.S. government money market funds are typically regarded as the safest of the three, and within that category, those with a high concentration of Treasuries—with full government backing—would be exposed to a lower likelihood of default risk.

What is the 7-day yield on a money market fund? ›

The 7-Day Yield represents the annualized fund yield based on the average income paid out over the previous seven days assuming interest income is not reinvested and it reflects the effect of all applicable waivers. Absent such waivers, the fund's yield would have been lower.

What are money market funds biggest risks? ›

Currency markets generally are not as regulated as securities markets. High yield fixed income securities are considered to be speculative and are subject to greater risk of loss, greater sensitivity to economic changes, valuation difficulties and potential illiquidity.

What is bad about a money market account? ›

Disadvantages of money market accounts may include hefty minimum balance requirements and monthly fees — and you might be able to find better yields with other deposit accounts.

How much money should you keep in a money market account? ›

Some money market accounts require minimum account balances for the higher rate of interest. Six to 12 months of living expenses are typically recommended for the amount of money that should be kept in cash in these types of accounts as emergency funds.

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