Five Things You Should Know About Money Market Funds

March 27, 2023

Investors have long used money market funds to manage their cash and other short-term funding needs. However, before deciding which money market funds are right for you or your clients, you want to keep in mind the following:

1. There are many different types of money market funds:

Money market funds are fixed income mutual funds that invest in debt securities with short maturities and very low credit risk. They offer ultra-low volatility and extremely good liquidity.

Some money market funds invest primarily in government securities, while others focus on taxexempt municipal securities or corporate debt securities. Money market funds that primarily invest in corporate debt securities are referred to as prime funds.

Money market funds are open-ended funds, meaning they may sell unlimited shares to customers. Shares of the fund are bought and sold at a price equivalent to the net asset value (NAV), which is calculated daily. The managers of money market funds aim to keep their NAV fixed at $1.00 per share using special pricing and valuation conventions. Some funds, such as prime and tax-exempt funds, allow their NAV to float based on the current market value of the securities in their portfolios.

Government money market funds generally do not have a floating NAV, which means they maintain a constant $1.00 per share NAV.

2. The uses of money market funds vary by the type of fund:

Money market funds are often structured to cater to different types of investors. Some funds are intended for retail investors, while others are intended for institutional investors. In response to the 2007-2008 financial crisis, the Securities Exchange Commission (SEC) adopted a series of amendments to its rules on money market funds. Those reforms improved money market fund resiliency. Today, money market funds are considered to be low-risk investments that are a good source of liquidity for both institutional and retail investors.

3. Money market funds have differing levels of risk:

Money market funds are defined by their type of investment — typically labeled as government, prime or municipal funds. Government funds invest 99.5% of their assets in cash and government securities such as short-term treasury bills and repurchase agreements, as described in section four.

There are two types of government money market funds, Treasury funds and Government funds. Treasury funds invest in securities issued by the U.S. Treasury typically with maturities of 397 days or less and backed by the full faith and credit of the U.S. Government. Government funds also invest in securities which are issued by the U.S. Treasury, along with U.S. Government agencies. Both types of government money market funds are considered extremely safe but only a Treasury fund invests purely in securities backed by the full faith and credit of the U.S. Government.

Municipal money market funds invest in municipal bonds issued by municipalities and municipal agencies. The interest they pay may be exempt from federal income tax.

Finally, prime money market funds are considered to be riskier than the other types of money market funds because they tend to invest in corporate commercial paper, along with repurchase agreements, certificates of deposit, and other bank debt securities.

4. The “repo” market plays an important role within the money market system:

A repurchase agreement, or “repo,” is a short-term secured loan between an entity such as the Federal Reserve Bank of New York and the money market funds.

For instance, the Federal Reserve Bank may sell securities to the money market fund and agree to repurchase those securities later at the same price plus interest. These securities serve as collateral for the short-term investment the money market fund requires. In this example, a Government Money Market Fund receives government and treasury securities as collateral; this in turn secures the cash placed with the Federal Reserve Bank.

Most repos mature overnight and are considered to be high quality and extremely safe investments which provides the money market industry with both yield and liquidity. On average, $4 trillion in repurchase agreements — collateralized short-term loans — are traded each day.

5. The money market fund industry is resilient:

While money market funds are not FDIC-insured, only two money market funds have failed. The first was a small institutional fund in 1994 and the other was the collapse of the Reserve Fund in September 2009, triggered by the Lehman Brothers bankruptcy.

Given that the industry’s first money market fund was established in 1971, two failures in more than 50 years speaks to the strength and resiliency of the money market fund industry.

If you would like to learn more about the money market options offered by the Cavanal Hill Funds please feel free to contact Bill King at 918-382-5491 or bill.king@



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