A portfolio of investments consisting of short-term (less than one year) securities that are high-quality, liquid monetary and debt instruments intended to earn interest for shareholders while sustaining a net asset value of $1/share.
At its most basic, a money market fund is a kind of mutual fund that only invests in specific kinds of securities. To be considered for inclusion in this type of fund, a security must generally be debt-based, have a short-term maturity of no more than 12 months, be very low risk and have a high level of liquidity. If the shares of a money market fund earn in excess of their target goal (net asset value of $1/share), investors receive distributions via dividend payments. The target goal and treatment of excess earnings help money market funds to serve as a steady source of low-risk and relatively low return yet reliable income for investors.
It is worth noting that not every money market fund is able to consistently meet the target net asset value goal of $1/share. When funds fall below this target, the trend is referred to as “breaking the buck.” Regulators are compelled to respond when funds break the buck and generally the fund is forced to liquidate. The highly-regulated nature of such funds makes them far safer, more stable and more resilient than many others because failure to meet a specific target may force liquidation of the fund. This obviously gives fund managers a critical motivation to stay on target and not screw around.
Mom: “I’m just not sure how we’re going to afford to send you to summer camp this year, Billy.”
Billy: “Oh, don’t worry. I have cultivated a steady stream of reliable income from investing my allowance in several money market funds. I’ll cover tuition.”
Mom: (Blinks repeatedly.) “Oh, um… okay. Thanks, Billy.”