What’s Cash Market Mutual Fund?

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A standard monetary instrument that causes loads of confusion to some buyers is cash market funds. Many individuals suppose that these monetary devices are comparable in look to cash market accounts, that are much like financial savings accounts.

Nonetheless, cash market funds, generally referred to as cash market mutual funds, are open-ended mutual funds that spend money on short-term securities. Funding professionals usually design them to protect money. Whereas cash market funds carry a modest quantity of danger, they’ll ship increased returns whereas providing extra safety and liquidity than different fixed-income funding automobiles.

These funds will not make you wealthy, however they’ll meet the wants of some cash-intensive buyers.

What’s a cash market fund and the way does it work?

Cash market fund managers spend money on short-term, low-risk debt securities, that are usually characterised by low volatility. These funds search to commerce at a flat $1 per share web asset worth, with the proceeds distributed to buyers within the type of dividends.

Though cash market funds usually pay decrease rates of interest than some fixed-income funding automobiles, the tradeoff is their security and stability. Buyers who want to save lots of money for emergencies — or just wish to accumulate cash whereas ready for his or her subsequent fairness funding — usually select cash market funds.

Nonetheless, you will need to observe that not like another choices equivalent to financial savings accounts, cash invested in cash market funds just isn’t protected by FDIC insurance coverage.

When funds fall beneath the $1-per-share benchmark, it’s referred to as “breaking the buck.” This does not occur usually, however it did occur in September 2008, after Lehman Brothers declared chapter. The disaster prompted some cash market funds to drop as a lot as 97 cents per share. When this occurred, the federal government stepped in and insured all fixed-value funds.

Regardless of this hedge, cash market mutual funds usually don’t profit from insurance coverage ensures or authorities intervention.

So, what is supposed by a cash market fund? They’re a comparatively secure strategy to make investments and are usually extra secure and accessible than different funding choices.

Kinds of Cash Market Mutual Funds

What’s an instance of a cash market fund? Varied monetary devices could make up a cash market mutual fund. The commonest are as follows:


Retail funds restrict possession to particular person buyers.


Because the title implies, institutional cash market funds serve establishments reasonably than people. Not like most forex markets, the NAV right here can float relying on market situations. Corporations and pension funds usually purchase most of these mutual funds.


Authorities cash market funds make investments a minimal of 99.5% of their funds in authorities securities. It often means the US Treasury, however may also imply government-sponsored enterprises equivalent to Fannie Mae and Freddie Mac.

Such a cash market fund could be purchased by each retail and institutional buyers.


Prime funds, generally referred to as “basic objective” funds, spend money on short-term financial institution and company debt.


Municipal cash markets make investments their property in tax-exempt bonds issued by municipalities. These funds are exempt from federal earnings tax and, in some circumstances, exempt from state private earnings tax.

Here is a take a look at the several types of cash market mutual funds:

Fund Kind major kind of kit
retail fund Designed for particular person buyers; Works to keep up $1-per-share NAV
institutional fund Serves firms and establishments equivalent to pension funds; May very well be a floating nav
treasure A minimum of 99.5% invested in money and US Treasury, a minimum of 80% invested in Treasury
solely treasure A minimum of 99.5% invested in money, US Treasury and/or repurchase agreements, a minimum of 80% in treasuries and repurchase agreements
authorities a minimum of 99.5% invested in money, US Treasuries and/or repurchase agreements, a minimum of 80% in treasuries and repurchase agreements; This may occasionally additionally embrace government-sponsored enterprises equivalent to Fannie Mae and Freddie Mac, however the US Treasury neither points nor ensures these securities.
Principal (Basic Goal) Fund property invested in any accepted, US-dollar denominated cash market devices as outlined by the SEC; This consists of business paper, certificates of deposit, company notes, private tools from international or home issuers, and reverse repurchase agreements.
Nationwide Municipality Invests a minimum of 80% of the fund’s property in municipal securities the place the curiosity is exempt from federal earnings tax
state municipality Invests a minimum of 80% of the fund’s property in municipal securities the place curiosity is exempt from federal earnings tax and particular person state earnings taxes

Who Can Think about Investing in Cash Market Funds?

Most people and establishments that flip to cash market funds have one factor on their thoughts: conservation of capital. However normally, account holders can entry their funds immediately.

As well as, cash markets usually provide increased rates of interest than normal financial savings accounts. And whereas cash market funds don’t profit from FDIC insurance coverage, they do have the next degree of safety as a result of they spend money on high-quality, ultra-short-term securities.

Concerns When Investing in Cash Market Funds

Despite the fact that cash market funds provide some advantages that you would be able to’t get with different monetary devices, these funds should not essentially appropriate for all fixed-income buyers. For that reason, people and establishments ought to think about the next:

expense ratio

The expense ratio is the annual value of proudly owning a fund, and they’re subtracted from the earnings that the fund generates. Particularly in a cash market fund, during which capital appreciation just isn’t an choice, a low expense ratio is necessary.


Even the most secure funds should take care of danger and danger. Though cash market funds are usually in a position to keep a secure NAV of $1, some funds could have property which can be riskier than others.

Charge of curiosity

One concern in recent times has been damaging rates of interest. The fund requires optimistic charges to generate the money wanted to cowl its charges and pay returns to cash market fund buyers. Nonetheless, with the Fed embarking on a cycle of aggressive rate of interest hikes, that is now not a problem — however nonetheless one thing to remember.

cash market funds vs cash market accounts

Whereas a cash market fund is a mutual fund, a cash market account acts as a checking account.

Just like financial savings accounts, cash market accounts usually restrict as much as six withdrawals per thirty days — though this has been briefly suspended as a result of COVID-19 — they usually maintain FDIC safety. As such, they operate extra like financial savings accounts than funding funds.

The way to Purchase Cash Market Funds

Shopping for cash market funds is much like shopping for shares. You possibly can merely log in to your brokerage account and purchase the funds of your selection.

If you need assist choosing the proper cash market fund, some on-line brokerages provide recommendation for a payment. In any other case, you will discover a fiduciary monetary advisor.

Are Cash Market Funds Proper for You?

Are Cash Market Funds a Good Funding? Cash market funds work finest for individuals who want fast entry to massive quantities of money. These funds will not make you wealthy, however they gives you a comparatively secure place to retailer funds and earn a modest return, usually increased than that provided by a financial savings account.

John Caesar contributed reporting to this text.

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In regards to the Writer

Will Healy is a contract enterprise and monetary author based mostly within the Dallas space. He has coated quite a lot of finance and news-based matters, together with the inventory market, actual property, insurance coverage, private finance, macroeconomics and politics. Will holds a Bachelor of Science in Journalism from Texas A&M College, a Grasp of Science in Geography from the College of North Texas, and a Grasp of Enterprise Administration from the College of Texas at Dallas.

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