How Money Market Funds Invest

Money market funds invest in a variety of financial instruments that are considered to be conservative and less risky. We detail them here.

Money market managers choose from multiple alternatives

What do money market managers invest in? One of the main characteristics of money market instruments is their low risk when it comes to chances of a default. So, a  typical money market fund portfolio consists of:


  • Commercial paper (unsecured promissory notes with maturities not exceeding 270 days, which is usually issued by large corporations; although some commercial paper is asset-backed) 

  • Certificates of Deposit also known as CDs (these are time deposits, where for locking the savings for a certain period of time, a saver receives interest higher than that of a regular savings account, while early withdrawals incur a penalty) 

  • Bankers acceptances (short-term instruments that are essentially promises by entities to pay in the future and are guaranteed by banks; the party holding the bankers acceptance can sell it to another party at a discount, then the buyer, such as a money market fund, will hold it until maturity to redeem it at face value and thus earn interest) 

  • Treasury bills (short-term debt instruments issued by the United States government that have a maturity of less than one year) 

  • Short-term corporate bonds (debt issued by corporations) 

When it comes to advantages and disadvantages of money market instruments, their relative safety is a major plus. And so is the ability to withdraw funds quickly. The negative side is their low rate of return. After all, the lower the risk, the smaller the return.

Trillions of dollars are invested in money market funds of all kinds whether these are retail, institutional, or tax-exempt funds. Many small retail investors have their cash automatically put in money market funds since many brokerage houses park the cash coming from sold investments into these funds until the next investment is made. The returns on money market tend to be higher than on regular bank deposits and the funds are easily redeemable.  This makes it somehow attractive for many investors and savers, whether individual or institutional.

Related articles on this site: