A money market fund is an open-end mutual fund that invests exclusively in high-quality, short-term debt instruments — Treasury bills, commercial paper, certificates of deposit, repurchase agreements, and similar instruments — with the objective of maintaining a stable net asset value (NAV) of $1.00 per share. They are registered under the Investment Company Act of 1940 and regulated by SEC Rule 2a-7, which imposes strict requirements on credit quality, maturity, diversification, and liquidity.
There are three main categories: government money market funds (invest only in U.S. government securities and repos backed by them — permitted to maintain a stable $1.00 NAV for retail and institutional investors); retail money market funds (invest in government, municipal, and high-quality private instruments — for natural persons only, stable NAV permitted); and institutional prime/municipal funds (can invest more broadly, must use a floating NAV, and can impose liquidity fees and redemption gates during stress periods).
Breaking the buck — when NAV falls below $1.00 — is a catastrophic event that happened most notably in the Reserve Primary Fund in September 2008 after Lehman Brothers' collapse, triggering a money market crisis. This event led to significant regulatory reforms under the 2010 and 2014 SEC amendments to Rule 2a-7.
Money market funds are often used as cash management vehicles in brokerage accounts and retirement plans. They are NOT FDIC insured (unlike bank money market accounts), though government fund investors have rarely lost principal.
> Exam tip: On the SIE and Series 6/7, know that money market funds are NOT bank deposits and are NOT FDIC insured. Know that institutional prime and municipal funds must use a floating NAV. Understand the difference between a money market fund (a mutual fund) and a bank money market account (FDIC-insured bank deposit).