How Liquid Is a Money Market Fund?

The Investment Company Act of 1940 governs money market funds.

Money market funds are extremely liquid investment vehicles offered by brokerage firms and mutual fund families.

Identification

Like a fox: safety first, liquidity second, both ahead of yield.

MMFs are distinct from the money market deposit accounts offered by banks. The MMDS's are insured by the Federal Deposit Insurance Corporation, and the MMFs are not.

Throughout the money market industry the acronym "SLY" is commonly employed to suggest their investors' three priorities: Safety, Liquidity and Yield in that order.

Redemptions

Money market funds account for their investors' holdings in shares of $1 each, and immediately redeem as many of these shares as investors demand. Further, they have gone to great lengths for decades to avoid "breaking the buck"--valuing shares at less than $1, thereby assuring actual or potential investors that their principal is safe.

History

In September 2008, though, after Lehman Brothers had declared bankruptcy, the oldest money market fund in the U.S., the Reserve Primary Fund, cut its share price to $.97, and announced a seven day delay in redemptions. Both were extraordinary actions.

Overall, over a period of decades, the record for the money market fund industry as to safety and liquidity has been outstanding.

References

• Motley Fool: Where to Mark Your Cash
• Securities and Exchange Commission: Association of Corporate Treasurers Comment
• Los Angeles Times: Money Market Fund 'Breaks the Buck'

Resources

• Crane Data's Money Fund Blog: Moody's, WSJ, and 'Breaking the Buck'