How to invest in money market funds
Editorial staff, J.P. Morgan Wealth Management
- Money market funds can be bought and sold through a brokerage account, individual retirement account (IRA) or managed investment account.
- The process of investing in a money market fund involves selecting a fund type that fits your goals, reviewing the expense ratio and credit quality, funding the account and monitoring your position.
- Money market funds offer liquidity and capital preservation advantages, as well as modest yields that can outpace those of savings accounts. But they also lack protection through the Federal Deposit Insurance Corporation (FDIC), carry credit risk and pose the rare possibility of losing your principal.
A money market fund is a specific type of mutual fund that invests in short-term, high-quality debt instruments. Unlike investments in the stock market or mutual funds that focus on equities, money market funds are not built for growth – they are built for stability, with most funds targeting a consistent net asset value (NAV) of $1 per share.
If you’re thinking of investing in money market funds, here’s what to consider before getting started.
Why invest in money market funds?
Simply put, money market funds are typically used as a place to invest money that you don’t need right now. Money market funds are often used as an alternative to a high-yield savings account or money market account because they tend to be more liquid and your money has the chance to earn a modest return. Money market funds are not typically used to grow wealth over the long term.
Money market funds are commonly used as a flexible cash management tool within a larger investment portfolio. Investors often rely on them to build or hold an emergency fund when quick access to cash is important, to park money temporarily while deciding where to allocate it next, or to manage short-term cash needs without overexposure to market risk.
You might find money market funds appealing because of the high liquidity they often offer. They’re also designed to preserve your principal rather than put it at risk – a modest yield on a money market account can outpace a savings account. While money market funds are typically seen as safer investment vehicles, they still come with some risk, though it is typically low.
Before investing, it’s worth considering how money market funds stack up against other cash management tools. Viewed against certificates of deposit (CDs), money market funds offer more flexibility because you’re not locked into a fixed term. Compared with Treasury bills, money market funds offer instant diversification across multiple instruments.
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Types of money market funds and their risks
Not all money market funds are the same. The three main types vary in what they invest in, how much they yield and what risks they carry.
- Government money market funds invest 99.5% or more of their assets in cash, U.S. government securities (including Treasury bills) or fully collateralized repurchase agreements. Because their holdings are backed by the federal government, they have the most conservative risk profile of the three fund types.
- Prime money market funds invest in a broader mix of short-term instruments, including corporate debt, commercial paper and CDs. They typically offer modestly higher yields than government funds, but they also introduce greater credit risk.
- Municipal money market funds invest in short-term municipal securities issued at the state and local level. The income they generate is generally exempt from federal income tax.
Understanding the risks is an important part of investing in any money market fund. Credit risk is the possibility that an underlying issuer could default on its obligations. Liquidity risk refers to a fund’s potential difficulty selling assets quickly enough to meet redemption requests during periods of financial stress.
There’s also the rare but real risk of “breaking the buck,” which occurs when a fund’s NAV falls below $1 per share. Finally, money market funds do enjoy the protections of the Securities Investor Protection Corporation (SIPC), but they are not insured by the FDIC like bank accounts.
How to choose a money market fund
Before you invest, it helps to know what to look for. Here are some key factors to evaluate when it comes to money market funds:
- Start with the fund type: If you’re looking for the lowest amount of risk, government money market funds are the most conservative. If you’re seeking modestly more yield, prime funds can be a good place to look. Finally, municipal funds may benefit you if you’re in a higher tax bracket.
- Review fees and expense ratios: Since money market fund yields are already pretty modest, the tiniest difference in fees can affect your returns. Some funds may also impose liquidity fees under certain market conditions, so check the fund’s prospectus for details before investing.
- Examine credit quality and maturity profile: Consider what the fund holds and how long those instruments take to mature. A fund’s prospectus and fact sheet are a reliable source for this information.
- Consider minimum investment requirements: The range can be wide, with some funds purchased through brokerage platforms having no minimum, and others requiring thousands of dollars to invest.
- Evaluate the fund sponsor: While sponsor support is never guaranteed, well-capitalized, reputable fund companies have historically been more likely to step in and absorb losses to prevent a fund from breaking the buck.
How to invest: General steps to get started with money market funds
Once you’ve decided a money market fund fits your financial picture, getting started is relatively straightforward. Let’s walk through the general process:
Open an account
Money market funds are widely available through brokerage accounts, IRAs and managed investment accounts. If you already have an investment account, you may be able to purchase shares directly through the platform without opening a new account.
Select a fund
Use the criteria outlined above to narrow your choices. Most brokerage platforms allow you to filter money market funds by yield, fund family and other characteristics. Before investing, read the fund’s prospectus and most recent shareholder report to make sure it aligns with your financial goals.
Fund your account and invest
Transfer the cash you’d like to invest and purchase shares of the money market fund. Most money market funds are redeemable on demand. Investors can sell shares back to the fund on any business day at the current NAV per share, and funds generally settle daily.
Consider automatic contributions
If you’re using a money market fund as a short-term savings vehicle or emergency fund, it may be appropriate to schedule recurring transfers to build the balance over time.
Monitor your account
Money market fund yields move when interest rates move, and fund structures can change. Keep an eye on yield, changes to the fund’s holdings or credit quality, expense ratio competitiveness, and any updates to redemption policies or fees.
The bottom line
Investing in money market funds may be right for investors who want their cash to do more than sit still. Money market funds accomplish this without taking on the volatility of stocks, bonds or longer-duration investments. Money market funds can be used for short-term goals like building an emergency fund, managing cash between investments or holding money while you weigh longer-term options. Understanding the three fund types, their respective risk profiles and how fees work can give you a meaningful advantage when choosing the right fund for your unique situation.
Frequently asked questions about investing in money market funds
Minimum investment requirements vary by fund and platform. Some money market funds available through brokerage accounts might have no minimum requirement, while others may require $500, $1,000 or significantly more for institutional share classes.
No. Money market funds are not FDIC insured, which is one of the key distinctions between a money market fund and a money market account held at a bank. Money market funds held through a brokerage account are covered by SIPC insurance, which provides limited protection in the event a brokerage firm fails but does not protect against investment losses within the fund or portfolio itself.
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Editorial staff, J.P. Morgan Wealth Management
