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Debt & Yield Curvesbeginner

Money Market Fund

A money market fund (MMF) is a pooled vehicle that invests in short-term, high-quality debt such as T-bills, bank bills, certificates of deposit, commercial paper, and repurchase agreements. In the US, MMFs are regulated under SEC Rule 2a-7. Government and retail MMFs may use a stable $1.00 NAV under amortised cost, while institutional prime and tax-exempt funds must use a floating NAV. The Australian equivalent is a cash management trust or enhanced cash fund. MMFs are the largest single buyer of commercial paper and short-dated bank debt.

Why it matters

An MMF is a coordinated way for retail investors and corporate treasurers to buy a slice of the wholesale money market. A single investor cannot easily buy a A$10 million bank bill. Pooling A$50 billion of customer cash, the fund manager buys those bills, NCDs, and Treasury Notes in size, sweeps the daily interest, and pays it out as a yield. The trade-off is credit and liquidity risk are real but small. The 2008 collapse of the Reserve Primary Fund to A$0.97 per share after Lehman's default proved that the $1.00 NAV is a target, not a promise.

Formulas

Weighted average maturity
WAM=∑i=1nwi×tiWAM = \sum_{i=1}^{n} w_i \times t_i
wiw_i is the portfolio weight of holding ii, tit_i is its days to maturity. SEC Rule 2a-7 caps WAM at 60 days for US money market funds.
Stable NAV trigger
∣NAVmarket−1.00∣>0.005|NAV_{\text{market}} - 1.00| > 0.005
If the market-based shadow NAV deviates by more than 0.5\% from the $1.00 amortised-cost NAV, the fund must re-price, an event commonly called breaking the buck.

Worked examples

Scenario

An Australian corporate treasurer parks A$20 million of operating cash in a cash management trust offering a posted yield of y=4.30%y = 4.30\% per annum, paid daily.

Solution

Approximate daily income = 20{,}000{,}000 \times 0.043/365 \approx \text{A\}2{,}356$. Over 30 days the position earns \approx \text{A\}70{,}700$. The fund holds bank bills, NCDs, and Treasury Notes. Liquidity is T+1 and the treasurer can wire funds out the next business day.

Scenario

On 16 September 2008, the Reserve Primary Fund marked its NAV down to US$0.97 after writing off US$785 million of Lehman commercial paper, triggering an industry-wide run.

Solution

Investors redeemed roughly US$300 billion from prime MMFs within a week. The US Treasury responded with a temporary guarantee of MMF NAVs and the Federal Reserve launched the AMLF and later the CPFF to stabilise the CP market. The episode drove the SEC's 2010, 2014, and 2023 Rule 2a-7 reforms.

Common mistakes

  • ✗MMFs are bank deposits and government-guaranteed. They are investment products, not deposits. The $1.00 NAV target is supported by Rule 2a-7 portfolio limits, not by the FDIC or the Australian Financial Claims Scheme. Reserve Primary Fund broke the buck in 2008.
  • ✗All MMFs maintain a $1.00 stable NAV. Since SEC reforms effective 2016 and revised in 2024, US institutional prime and institutional tax-exempt funds use a floating NAV marked daily to four decimal places. Only government and retail MMFs may keep a stable $1.00.
  • ✗MMFs earn returns far above bank deposits. Returns sit close to the central bank policy rate minus a small management fee. The spread over savings accounts is real but rarely exceeds 50 to 100 basis points, and it inverts when the central bank lifts rates faster than banks pass through deposit increases.

Revision bullets

  • •Pooled short-term debt investment
  • •US Rule 2a-7 caps WAM at 60 days
  • •Stable $1.00 NAV for government and retail funds
  • •Floating NAV for institutional prime and tax-exempt funds
  • •Largest holder of commercial paper and NCDs
  • •Not deposit-insured, can break the buck

Quick check

Breaking the buck refers to

Why are institutional prime MMFs required to use a floating NAV?

Connected topics

Money MktComm. PaperCDs

In learning paths

Fixed Income & Rates Path

Sources

  1. SEC Rule 2a-7 (2023 reforms)
    U.S. Securities and Exchange Commission. SEC Adopts Money Market Fund Reforms. Press Release 2023-129, 12 July 2023.
    The current US regulatory framework for MMFs, including portfolio quality, WAM limits, and the floating NAV requirement for institutional prime and tax-exempt funds.
  2. SEC Final Rule (2023)
    U.S. Securities and Exchange Commission. Money Market Fund Reforms; Form PF Reporting Requirements for Large Liquidity Fund Advisers. Final Rule, July 2023.
    Removal of redemption gates and revised liquidity fee framework effective June 2024, the most recent overhaul of the MMF rulebook.
  3. Hull (2022), §4.1
    Hull, John C. Options, Futures, and Other Derivatives. 11th ed. Pearson, 2022. ISBN 978-0-13-693997-9.
    Introduces money market funds and their place in the short-term wholesale funding ecosystem.
  4. ICI Mutual Fund Fact Book
    Investment Company Institute. 2025 Investment Company Fact Book, Ch. 5 Money Market Funds. ICI, 2025.
    Industry data on US MMF assets, portfolio composition, and the post-2008 shift from prime to government funds.
  5. Fabozzi (2021), Ch. 12
    Fabozzi, Frank J. Bond Markets, Analysis, and Strategies. 10th ed. MIT Press, 2021. ISBN 978-0-262-04627-3.
    Standard treatment of MMF structure, instrument selection, and the historical run dynamics.
How to cite this page
Dr. Phil's Quant Lab. (2026). Money Market Fund. Derivatives Atlas. https://phucnguyenvan.com/concept/mmf
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