Can you lose money in a money market fund? Risks, rules and what to know
Editorial staff, J.P. Morgan Wealth Management
- While money market funds are designed to be relatively low-risk cash management vehicles, they are still investments – so it’s possible to lose money in them.
- The main risks of money market funds include credit risk, interest rate risk, liquidity risk and – in rare cases – a drop in net asset value (NAV) below the traditional $1-per-share price.
- Government and Treasury money market funds are generally viewed as lower risk than prime money market funds, but none are insured by the Federal Deposit Insurance Corporation (FDIC).
If you’re wondering whether you can lose money in a money market fund, the answer is yes – but usually only in limited or unusual circumstances. Money market funds are mutual funds that are designed to preserve principal, provide liquidity and invest in short-term debt, as well as in cash and cash equivalents. This makes them lower risk than many other mutual funds and other types of investments. Still, money market funds are not the same as money market accounts, which means they are not insured by the FDIC – so there’s always a risk of losing some or all of your money when investing in this type of fund.
Money market funds can be a useful option for some investors. Understanding how these instruments work, what can go wrong and how regulations are designed to reduce their risks can help investors decide when a money market fund makes sense – and when another cash-like vehicle may be a better fit.
How money market funds work
A money market fund is a type of mutual fund that invests in short-term debt securities rather than stocks or long-term bonds. Typically, these include cash, cash equivalents and high-quality debt securities with short maturities, such as U.S. Treasury bills, commercial paper, certificates of deposit (CDs) and repurchase agreements.
Money market funds generally seek to maintain a stable NAV of $1 per share. This stable price is part of what makes them popular for short-term cash management, though stability is a goal and not a guarantee.
There are several types of money market funds:
- Prime money market funds: These invest primarily in taxable short-term corporate and bank debt securities, including commercial paper and CDs.
- Government or Treasury money market funds: These funds invest 99.5% or more of their assets in very liquid securities such as cash, government securities and repurchase agreements fully collateralized by cash or government securities.
- Tax-exempt or municipal money market funds: These invest 80% or more of their assets in municipal securities, including state and local government bonds whose interest is generally exempt from federal income taxes and may be exempt from state taxes depending on your state of residence.
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Risks associated with money market funds
Although they are low risk in nature, money market funds are not entirely risk-free. If a fund is exposed to substantial losses from some of its holdings, investors can lose value, including during times of broader market turbulence.
There’s also interest rate risk to consider, though this tends to be lower than in longer-duration bond funds because money market instruments have short maturities. Changing rates and inflation can affect the yield paid by the fund and the value of the underlying securities, especially as the portfolio turns over into newer, higher- or lower-yielding instruments.
Liquidity risk matters, too, and is in fact one of the main considerations for money market funds. During periods of market stress, some funds may face heavier redemption pressure from investors wanting cash quickly. Liquidity risk was a central concern during the 2008 financial crisis and the COVID-19 market disruptions in 2020. Since then, the Securities and Exchange Commission (SEC) has implemented certain reforms to strengthen the structure of money market funds, including stricter liquidity and higher credit quality requirements as well as shorter maturity limits.
The rare but most widely discussed risk is “breaking the buck,” when a money market fund’s NAV falls below $1 per share. This can happen if the securities a fund holds fall in value enough to push the fund’s NAV below that level. Breaking the buck doesn’t happen often, but it’s perhaps the clearest example of how principal loss can occur in a product many investors associate with stability.
Regulatory protections and fund management practices
Money market funds operate under SEC Rule 2a-7, which imposes standards on portfolio quality, maturity, diversification and liquidity. The rule was adopted to limit risk in money market mutual funds by requiring them to hold short-term, high-quality securities and maintain diversification standards.
Additionally, fund managers can play a practical role in risk control. For example, they can decide which short-term instruments to hold, how much liquidity to maintain and how to balance yield against risk and flexibility.
When and how money market funds can lose value
Losses are most likely to occur when several pressures hit at once, such as heavy redemption requests and strained funding markets. Money market funds are also not guaranteed by any government agency, so principal loss is possible in severe conditions.
One of the best-known examples came in 2008, when the Reserve Primary Fund experienced significant losses tied to Lehman Brothers’ commercial paper. As a result, investors initiated a run that ultimately affected the value of other money market funds. The event triggered widespread concern about liquidity in prime money market funds and led to emergency support measures and additional SEC regulatory reforms.
When problems emerge, a money market fund may respond in several ways depending on its structure and the rules in place. Tools such as liquidity fees or gates have been introduced to help funds manage redemption pressure and reduce destabilizing runs. If a run on a fund occurs, liquidity fees are sometimes imposed by certain funds to protect the remaining shareholders and discourage further runs. Even so, these safeguards only help reduce risk – they do not eliminate it.
Alternatives and considerations for investors
Money market funds are often compared with savings accounts, CDs and Treasury bills because all are commonly used for cash management. But these instruments are not interchangeable. Money market funds are investment products, and are therefore not covered by FDIC insurance the way bank accounts are.
The difference matters: A savings account may offer FDIC insurance up to applicable limits, while a money market fund offers market-based yield potential with investment risk, even if the risk is generally low.
When evaluating a money market fund, investors may want to consider the type of fund, the underlying holdings, the sponsor and the risk disclosure.
The bottom line
Money market funds are generally considered low-risk investments, but they are not guaranteed, and losses are possible. Their appeal comes from short-term, high-quality holdings and rules designed to support liquidity and stability. However, investors still need to understand credit and liquidity risk, as well as the difference between money market funds and FDIC-insured bank products.
For many investors, the practical question is not whether money market funds are “safe” in an absolute sense, but whether they are the right fit for the role they are supposed to play in a portfolio. If the goal is short-term cash management with relatively low risk, then money market funds may be worth considering. If principal is the priority, then a high-yield savings account, money market account, bond, or other fixed-income asset or FDIC-insured account may be a better fit.
Frequently asked questions about money market funds
No. Money market funds are investment products, not bank deposit accounts. As such, they are not insured or guaranteed by the FDIC or any other government agency.
Money market funds generally invest in short-term, high-quality securities such as Treasury bills, commercial paper, CDs and similar cash-equivalents. The exact mix depends on whether the fund is a prime, government or municipal money market fund.
A money market fund is an investment product that seeks stability and yield through short-term debt holdings. A savings account is a bank deposit product that may be FDIC-insured up to applicable limits. A money market fund may offer different yields than a federally insured savings account but also carries investment risk that the latter does not.
Yes. It’s possible to lose money by investing in a money market fund, even though these funds are generally designed to be lower risk and seek a stable $1 share price. In rare cases, a fund can “break the buck” and investors can lose principal.
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Editorial staff, J.P. Morgan Wealth Management
