A money market fund is an open-ended shared fund that spends in short-term debt securities. Synchronized under the Investment Company Act of 1940, money market funds are main providers of liquidity to financial mediators.
In 1971, Bruce R. Bent and Henry B. R. Brown founded the first money market fund in the U.S. It was given name The Reserve Fund and was presented to investors who were interested in preserving their cash and earning a small rate of profit.
Money market funds request to limit disclosure to losses due to credit, market, and liquidity risks. Money market funds, in the United States, are synchronized by the Securities and Exchange Commission's (SEC) Investment Company Act of 1940. Rule 2a-7 of the act limits investments in money market funds by class, maturity and variety. Under this act, a money fund mostly buys the highest rated debt, which establishes in less than 13 months. The portfolio must preserve a weighted average maturity (WAM) of 60 days or less and not spend more than 5% in any one issuer, excluding for government securities and repurchase agreements.
Qualified money market securities contain commercial paper, repurchase agreements, short-term bonds or other money funds. Money market securities must be extremely liquid and of the highest class.
Money market funds are often subject to risk, because the money is being lent out to both private and government corporate entities that at all times hold some risk of evasion, no matter how thin. For fund investors to lose any money at all would be very strange, but it can happen. For example, in 2007, a lot of money market funds in Canada were at risk of fall down because the commercial paper they were provided in included sub prime mortgage-backed securities that were themselves about to fall down.
A money-market fund is the perfect place for money that will be needed in the near future, to keep an urgent situation cash fund, or to park your money while looking for more attractive investment chances. If interest rates are high, and the stock market is looking worried, you may want to allow the money sit until things settle down. These funds usually pay two or three percentage points higher rates of profit than savings accounts and are very safe because of the short-term nature of the investments held. If safety of assets is your number one concern, you should select a money-market fund that invests solely in treasury bills. This is as risk free as you can find, because the Government of Canada stands behind the T-bills in the fund's portfolio. As money-market funds move away from Government of Canada assets bills to provincial assets bills and debentures issued by chief corporations, the risk increases, but it is still exceptionally small.