What is Money Market Fund?

Full Definition

A money market fund is a pooled investment fund that invests in a diversified portfolio of very short-term, high-credit-quality debt instruments, such as short-dated government and corporate debt (typically maturing in a few days to under a year) and bank deposits, aiming to preserve capital and provide a return broadly in line with short-term interest rates, rather than aiming for significant capital growth. Because the underlying investments are short-dated and generally high quality, money market funds are considered relatively low risk compared with equity or longer-dated bond funds, and are often used by investors and businesses as a place to hold cash they may need at relatively short notice while still earning a return closer to prevailing interest rates than a typical instant-access bank account, though unlike a bank deposit, the value of a money market fund can still fall and is not covered by the Financial Services Compensation Scheme in the same way as an eligible bank or building society deposit. Money market funds are commonly used within Stocks and Shares ISAs and SIPPs as a low-risk "parking" option for cash awaiting reinvestment, or as the low-risk element of a wider diversified portfolio, and by larger businesses and institutions to manage short-term cash and working capital more efficiently than leaving it in a standard bank account, though retail investors should still check a specific fund's fees, credit quality of its holdings, and whether it aims to maintain a stable unit price or allows its value to fluctuate.

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