Money Market Funds: Where Cash Earns a Yield
Money market funds pay a yield that tracks short-term interest rates, but they are securities rather than deposits — and the distinction matters more than most savers realise.
What a money market fund actually holds
A money market fund invests in very short-dated, high-quality debt and aims to keep its share price stable while paying out whatever interest the portfolio earns. The holdings are unglamorous by design: Treasury bills, short-term government agency paper, repurchase agreements collateralised by government securities and, in some categories, commercial paper and certificates of deposit from highly rated banks and companies. Regulation caps how far out these funds can reach — US rules limit a fund's weighted average maturity to 60 days and its weighted average life to 120 days — which is why the portfolio is constantly maturing and being reinvested. The category is enormous: weekly data published by the Investment Company Institute put total US money market fund assets at roughly $7.9 trillion in mid-September 2026, with government funds accounting for something like four-fifths of that.
Why the yield follows policy rates, with a lag
Because the portfolio turns over so quickly, a money market fund's yield is close to a live read on short-term interest rates. When a central bank moves, newly issued paper reprices almost immediately, but the fund still holds instruments bought at the old rate until they mature — so its quoted yield drifts toward the new level over weeks rather than jumping overnight. That lag cuts both ways: these funds are slow to give up yield when rates fall and slow to capture it when rates rise. For context, the Federal Reserve's target range for the federal funds rate stood at 3.75% to 4.00% after its September 2026 meeting. Fund yields are usually quoted as a seven-day yield, net of expenses, which is why fees matter disproportionately here: on a portfolio yielding a few percent, a few tenths of a percentage point in charges is a meaningful share of the return.
- Government funds hold essentially only government securities and related repurchase agreements. They hold the bulk of industry assets and are generally the lowest-yielding category.
- Prime funds also hold short-term bank and corporate paper, which typically pays a little more but carries credit exposure to private issuers and can be hard to sell in a stressed market.
- Tax-exempt or municipal funds hold short-term debt issued by states and local authorities; their interest may escape some taxes, which makes their headline yield hard to compare directly with the others.
A fund is not a deposit — what protection actually applies
This is the point most worth getting right. Money in a bank deposit account is a liability of the bank: the bank owes it to you, and in the United States that obligation is backed by federal deposit insurance up to the applicable limit — currently $250,000 per depositor, per insured bank, per ownership category — with equivalent schemes elsewhere at their own limits. A money market fund share is different: it is a security representing a slice of a portfolio of debt instruments. It carries no deposit insurance, no government guarantee, and no obligation on the sponsor to make holders whole. In a US brokerage account, SIPC coverage may apply, but that protects against a brokerage failing while holding your assets, not against those assets falling in value. The stable share price these funds target is an aim, not a contractual promise. In September 2008, one large prime fund holding the commercial paper of a failed investment bank saw its share price fall below a dollar — the episode known as ‘breaking the buck’ — triggering heavy redemptions across the sector and a temporary government guarantee programme. Reforms followed in 2010, 2014 and 2023, tightening liquidity requirements, moving institutional prime and municipal funds to a floating share price, and replacing redemption gates with mandatory liquidity fees in defined circumstances.
What happens when rates fall
The obvious risk here is not usually dramatic loss; it is that the yield quietly disappears. When policy rates fall, the fund's payout follows within weeks, and no fixed term protects the rate you were getting. In the near-zero-rate stretch after 2009, and again in 2020 and 2021, many funds yielded close to nothing and sponsors waived fees to keep net yields from turning negative. Locking in a rate for longer means accepting interest rate risk elsewhere, in longer-dated bonds or term deposits, where a fall in rates lifts the value of what you already hold. That is a trade-off between certainty of price and certainty of income. Yields, rules and protection limits change and differ by country, so check a fund's own prospectus and your local deposit protection rules.
This article is educational and general in nature. It isn’t personalized investment, tax, or legal advice — always weigh your own circumstances, or talk to a licensed professional, before making financial decisions.