Legal Definitions - money-market fund

Money-Market Fund

A money-market fund is a specific type of mutual fund that pools money from many investors to primarily invest in highly liquid, short-term debt instruments. These funds are designed to provide investors with a relatively safe place to store cash, offering stability, easy access to funds, and a modest return. They typically invest in low-risk securities such as U.S. Treasury bills, commercial paper, and certificates of deposit, aiming to preserve capital rather than achieve significant growth.

Here are some examples:

• Example 1: Emergency Savings Account

  Sarah wants to build an emergency fund of six months' living expenses. Instead of keeping all the money in a standard savings account with a very low interest rate, she decides to put a portion into a money-market fund offered by her brokerage. This allows her money to earn a slightly higher return while remaining easily accessible if an unexpected expense arises, such as a car repair or medical bill.

  This illustrates a money-market fund because Sarah prioritizes safety and liquidity for her emergency savings. The fund's investment in short-term, low-risk debt instruments ensures her capital is preserved, and she can withdraw it quickly when needed, aligning with the fund's primary goals.

• Example 2: Holding Cash Between Investments

  David recently sold a large block of shares from his investment portfolio and is waiting for a new opportunity to buy into a different stock. Rather than letting the substantial cash proceeds sit idle in his brokerage account, earning almost nothing, he temporarily moves it into a money-market fund. He plans to keep it there for a few weeks or months until he identifies his next long-term investment.

  This demonstrates a money-market fund's utility because David needs a secure, temporary holding place for a significant sum of money. The fund provides a safe harbor that offers a small return, preventing the cash from losing purchasing power to inflation, without exposing it to the volatility of the stock market while he waits for his next move.

• Example 3: Small Business Operating Capital

  A small graphic design studio, "Creative Canvas Inc.," often has varying amounts of cash on hand throughout the year, depending on project cycles. To ensure they always have funds available for payroll, rent, and supplies, but also to make their idle cash work for them, the company's CFO places excess operating capital into a corporate money-market fund. This allows them to easily access funds for immediate needs while earning a modest return on their reserves.

  This exemplifies a money-market fund because Creative Canvas Inc. requires both liquidity for daily operations and a safe, low-risk way to manage its fluctuating cash reserves. The fund's structure allows the business to maintain readily available capital while generating some income, aligning with its need for financial flexibility and capital preservation.