Money Market Mutual Funds

Current Issues Project: Money Market Mutual Funds

Money market mutual funds are mutual funds that invest in short-term debt securities. This investment tool has been used by individuals and institutions for decades but the way money market funds operate has changed drastically over the last five years. There are a few reasons for the changes. The bankruptcy of Lehman Brothers Holdings Inc. in 2008 caused the Reserve Primary Fund to break the buck and decreased the overall trust in money market funds. To help the failing financial system, The Treasury Department enacted The Emergency Economic Stabilization Act of 2008, which, in addition to helping the economy, contributed to moral hazard. Finally, the Securities and Exchange Commission proposed two drastic reforms to ensure future success of money market funds. Some of these events caused the biggest meltdown since the Great Depression while others helped the country to slowly get back on track and start moving towards a stable growth.

A money market fund is a good alternative to a bank’s checking or savings account. It is managed by a mutual fund company, which pools funds from investors and buys short-term securities. (Financial Stability Oversight Council) Similarly to FDIC insured bank deposits, money market funds are considered to be a safe place to keep one’s money. Although the interest rates offered by money market mutual funds are not very high, the probability of losing the investment is extremely low. In addition, the money invested in a money market fund is just as liquid as money deposited in a bank. Deposit and withdrawal activities can be conducted on a daily basis without losing value of money.

On the contrary, money market funds do not offer insurance for the investment. If, for some reason, a mutual fund company, managing the money, fails, the investor can lose the principal amount of the investment. Bank deposits...