Money funds
(or money market funds, money market mutual funds)
are mutual funds that invest in short-term debt instruments.
Explanation
Money market
funds, also known as principal stability funds, seek to limit
exposure to losses due to credit, market, and liquidity risks.
Money market funds in the United States are regulated by the Securities
and Exchange Commission's (SEC) Investment Company Act of 1940.
Rule 2a-7 of the act restricts investments in money market funds
by quality, maturity and diversity. Under this act, a money fund
mainly buys the highest rated debt which matures in under 13 months.
The portfolio must maintain a Weighted Average Maturity (WAM)
of 90 days or less and not invest more than 5% in any one issuer,
except for government and repurchase agreement securities.
Money market
funds seek a stable $1.00 Net Asset value (NAV). Since the 2a-7
rule was adopted only one fund "broke the buck" in 1994, paying
investors $0.96 per share. That fund was the Community Bankers
US Government Fund and had invested a large percentage of its
assets into adjustable rate securities. As interest rates increased,
these floating rate securities lost value.
Eligible money
market securities include commercial paper, repurchase agreements,
short-term bonds or other money funds. Money market securities
must be highly liquid, and have a stable value.
Money
market accounts
Banks in the
United States offer savings and money market deposit accounts,
but these shouldn't be confused with money market mutual funds.
These bank accounts offer higher yields than traditional passbook
savings accounts, but often with higher minimum balance requirements
and limited transactions. A money market account may refer to
a money market mutual fund, a bank money market deposit account
(MMDA) or a brokerage sweep free credit balance.
History
In 1971, Bruce
R. Bent established the first money market fund in the U.S. The
Reserve Fund was offered to investors who were interested in preserving
their cash and earning a small rate of return. Today, almost 2,000
money funds are in operation, with total assets of over US$2.3
trillion.
Outside of
the U.S., the first money market fund was set up in 1968 and was
designed for small investors. The fund was called Conta Garantia
and was created by John Oswin Schroy. The fund's investments included
low denominations of commercial paper.
Institutional
money fund
Institutional
money funds are high minimum investment, low expense share classes
which are marketed to corporations, governments, or fiduciaries.
They are often set up so that money is swept to them overnight
from a company's main operating accounts. Large national chains
often have many accounts with banks all across the country, but
electronically pull a majority of funds on deposit with them to
a concentrated money market fund.
The largest
institutional money fund is the JPMorgan Prime Money Market Fund,
with over US$100 billion in assets. Among the largest companies
offering institutional money funds are BlackRock, Federated, Columbia
(Bank of America), Dreyfus, AIM and Evergreen (Wachovia).
Retail
money funds
Retail money
funds are offered primarily to individuals with moderate-sized
accounts. Their primary use is as temporary holding funds at stock
brokerage firms. Retail money market funds hold roughly 40% of
all money market fund assets.
Retail money
funds invest in short-term debt, such as US Treasury bills and
commercial paper, come in a few different breeds: government-only
funds, non-government funds and tax-free funds. Investors will
obtain a slightly higher yield in the non-government variety,
whose principle holdings are high-quality commercial paper and
other instruments. Money funds for individuals are currently yielding
around 4.5%. Instruments of the United States Government are usually
exempt from state income taxes, and their returns are lower as
a result.
The largest
money market mutual fund is Fidelity Investments' Cash Reserves
(Nasdaq:FDRXX), with assets exceeding US$110 billion. The largest
retail money fund providers include: Fidelity, Vanguard (Nasdaq:VMMXX),
and Schwab (Nasdaq:SWVXX).
See
also
External
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