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History and Types of Money Market Accounts


Money funds (or money market funds, money market mutual funds) are mutual funds that invest in short-term debt instruments.


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.


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 links

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