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Market Mutual Funds

When we speak of money market funds as they apply to mutual funds we refer to investments that seek to limit the risk of loss to the investors from such factors as: credit, market or liquidity risks. In the United States the Securities and Exchange Commission's (SEC) Investment Company Act of 1940 set down the rules that regulate the money market funds.

One of the regulations, Rule 2a-7, stipulates that investors are restricted in money market funds by quality, maturity and diversity. Money funds according to the act must buy the highest rated debt and one that is maturing in less than 13 months. It must also maintain what is known as a Weighted Average Maturity (WAM) of 90 days or less and also not invest over 5% in any one issuer. The exception to that being government securities and repurchase agreements. Securities that are eligible market securities can include commercial paper, repurchase agreements and short term bonds or other similar money funds. They should all be fairly liquid and of the best quality.

A term used to describe when a funds net asset value or NAV loses money or drops below the $1 NAV is referred to as "broke the buck" and is seldom seen. From 1971 up to 2008 there has only been one failure and that was when the Community of Bankers US Government Fund broke the buck in 1994 and began paying investors only 96 cents per share.

Some banking institutes in the United States offer savings and money market deposit accounts but these are not the same as money mutual funds. These types of accounts do offer a higher yield that normal passbook savings but also require a higher minimum balance and limited transaction availability. Money market accounts in the United States can refer to a money market mutual fund, a bank money market deposit account or a brokerage sweep free credit balance.

According to Investment Company Institute reports as of December 11, 2008 almost 2000 money funds were operating in the US with a total combined asset of $8 trillion US. $3.8 trillion of this was in money market funds.

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