Money Market Mutual Funds Guide — Prime, Government, Treasury, and Municipal Funds

What Is a Money Market Fund?

A money market fund is a type of mutual fund designed to offer investors a safe, liquid place to park cash while earning a modest return. The fund invests in short-term, high-quality debt instruments with maturities typically under 13 months. The portfolio is managed to maintain a stable net asset value of $1.00 per share, though this is not guaranteed. Money market funds are regulated under SEC Rule 2a-7, which imposes strict requirements on credit quality, maturity, and diversification. The yield fluctuates with short-term interest rates set by the Federal Reserve. These funds are commonly used as sweep accounts in brokerage accounts, as an alternative to bank savings for emergency funds, and as a cash management tool for institutions. The Vanguard Federal Money Market Fund (VMFXX), the largest money market fund, had over $300 billion in assets and a 7-day yield of approximately 4.5% as of mid-2026.

Important distinction: Money market mutual funds (offered by Vanguard, Fidelity, Schwab, etc.) are different from bank money market accounts. Bank money market accounts are deposit accounts insured by FDIC up to $250,000. Money market funds are investments that are not FDIC insured and could theoretically lose value, though this is rare. The Reserve Primary Fund "broke the buck" in 2008, falling to $0.97 per share after Lehman Brothers defaulted on its commercial paper, triggering a run on money market funds and leading to major regulatory reforms. See high-yield savings accounts for a comparison with bank accounts.

Types of Money Market Funds

Government Funds (G-Funds)

Government money market funds are required to invest at least 99.5% of their assets in US government securities, including Treasury bills, notes, and repurchase agreements backed by government agencies. These are the safest type of money market fund and typically serve as the default sweep option in brokerage accounts. Because the underlying securities are backed by the full faith and credit of the US government, default risk is virtually zero. Government funds are subject to federal income tax but are exempt from state and local taxes if they meet certain thresholds. The Vanguard Federal Money Market Fund (VMFXX), with a 7-day yield of approximately 4.5%, is the largest money market fund in the world. Government funds are best suited for emergency funds, brokerage cash sweeps, and conservative investors who prioritize safety above yield.

Treasury Funds (T-Funds)

Treasury money market funds invest exclusively in Treasury bills and Treasury notes with short maturities. Because they hold only direct obligations of the US Treasury, they carry the lowest possible credit risk — lower than government funds that may include agency securities. The key advantage of Treasury funds is that the interest is exempt from state and local income taxes, making them attractive for investors in high-tax states like California and New York. Treasury funds typically yield slightly less than government funds because they exclude agency securities that offer marginally higher yields. They are ideal for investors seeking maximum safety with state tax benefits. The Fidelity Treasury Money Market Fund (FDLXX) and Vanguard Treasury Money Market Fund (VUSXX) are popular examples.

Prime Funds (P-Funds)

Prime money market funds invest in a broader range of short-term instruments, including commercial paper, certificates of deposit, corporate debt, and repurchase agreements. Because they take on slightly more credit risk, prime funds typically offer higher yields than government or Treasury funds. However, this comes with greater risk. The most famous example of this risk materializing is the Reserve Primary Fund, which "broke the buck" in September 2008 when its holdings of Lehman Brothers commercial paper became worthless, causing its NAV to fall to $0.97. This triggered a run on prime money market funds and a freeze in the commercial paper market, requiring federal intervention. After regulatory reforms in 2016, institutional prime funds are now required to have a floating NAV that can deviate from $1.00, rather than a stable $1.00 NAV. Prime funds are best suited for investors seeking higher yield who understand and accept the additional risk. They are commonly used by institutions and sophisticated investors for cash management.

Municipal Money Market Funds

Municipal money market funds invest in short-term municipal bonds issued by state and local governments. The interest earned is exempt from federal income tax and may also be exempt from state and local taxes if the fund invests in bonds from your state of residence. These funds typically offer lower pre-tax yields than prime or government funds, but the tax exemption can result in higher after-tax yields for investors in high tax brackets. The tax-equivalent yield formula helps compare: tax-equivalent yield = municipal yield / (1 - marginal tax rate). For example, a municipal fund yielding 3.0% for an investor in the 37% federal bracket has a tax-equivalent yield of 3.0% / 0.63 = 4.76%. These funds are best for high-net-worth investors in high tax brackets who hold taxable accounts. See municipal bonds guide for more on tax-free investing.

Key Metrics

7-Day Yield is the most commonly quoted yield for money market funds. It represents the fund's annualized yield based on the dividends paid over the past seven days, assuming the yield stays constant. It is calculated as: (dividends per share over 7 days / NAV) × (365 / 7). This yield fluctuates daily with changes in short-term interest rates. Unlike the SEC 30-day yield used for bond funds, the 7-day yield gives a more current picture of what the fund is earning.

Weighted Average Maturity (WAM) measures the average time until all securities in the portfolio mature, weighted by each security's percentage of total assets. SEC Rule 2a-7 requires money market funds to maintain a WAM of 60 days or less. A shorter WAM means less sensitivity to interest rate changes. For example, a fund with a WAM of 30 days would see its yield adjust to Fed rate changes faster than a fund with a WAM of 55 days.

Weighted Average Life (WAL) is similar to WAM but measures the average time until the final maturity of each security, ignoring any interest rate reset features. SEC Rule 2a-7 requires a WAL of 120 days or less. The WAL is always equal to or greater than the WAM because it strips out the effect of floating-rate resets. Investors should monitor WAL to gauge how long the fund's assets are truly locked up.

Regulation After 2008 / 2016

The 2008 financial crisis was a watershed moment for money market fund regulation. When the Reserve Primary Fund broke the buck, it triggered a system-wide run on prime money market funds. In just one week, investors withdrew over $300 billion from prime funds, freezing the commercial paper market and threatening the broader financial system. The Treasury Department was forced to temporarily guarantee money market fund assets to stop the run. This led to comprehensive reforms.

SEC Rule 2a-7 now imposes the following key requirements:

• Portfolio quality: All securities must be rated in the highest short-term rating category by at least two nationally recognized statistical rating organizations (NRSROs). No more than 5% of assets can be invested in second-tier securities.
• Maturity limits: WAM ≤ 60 days, WAL ≤ 120 days. Maximum individual security maturity is 397 days (13 months).
• Liquidity requirements: At least 10% of assets must be in daily liquid assets (cash, Treasury securities, or securities maturing within 1 day). At least 30% must be in weekly liquid assets (maturing within 5 days).
• Stress testing: Funds must conduct periodic stress testing to assess their ability to maintain stable NAV under adverse market conditions.

2016 reforms went further:

• Floating NAV: Institutional prime and municipal money market funds are now required to use a floating NAV, allowing the share price to deviate from $1.00. Retail prime and municipal funds, and all government funds, can still maintain a stable $1.00 NAV.
• Redemption gates and fees: Funds may impose liquidity fees (up to 2%) on redemptions or temporarily suspend redemptions (gates) if weekly liquid assets fall below 30% of total assets. These tools are designed to prevent runs by making rapid withdrawal costly.

These reforms have made money market funds more resilient, but they also introduced complexity. Investors in institutional prime funds should be aware that their cash balance may fluctuate in value. See CD ladder and money market guide for a practical comparison of cash management options.

When to Use Each Type

Emergency fund: Use a government or Treasury fund. The highest level of safety ensures your cash is there when you need it most. The slight yield difference is not worth the incremental risk for money that must be available during a crisis. See emergency fund guide for how much to hold.

High-tax bracket investor: Use a municipal money market fund in your taxable account. The tax-equivalent yield often exceeds what you would earn from a taxable fund after accounting for federal and state taxes. Compare using the formula: tax-equivalent yield = muni yield / (1 - marginal tax rate).

Brokerage sweep: Most brokerages use government money market funds as the default sweep vehicle for uninvested cash. Vanguard uses VMFXX (Federal Money Market), Fidelity uses FDRXX or SPAXX (government funds), and Schwab uses SWVXX (a prime fund). You can often choose which fund to sweep into.

Higher yield: Use a prime fund if you understand the risks and are investing money that you do not need immediate access to during a crisis. Prime funds typically yield 10-30 basis points more than government funds. Note that institutional prime funds now have floating NAVs.

Maximizing after-tax yield: Always compare on an after-tax basis. For a taxpayer in the 37% federal bracket plus 9.3% California state tax, a California municipal money market fund yielding 3.0% has a tax-equivalent yield of approximately 3.0% / (1 - 0.37 - 0.093) = 3.0% / 0.537 = 5.59%, far exceeding taxable alternatives.

High-tax state resident: Use a Treasury fund to avoid state income tax on the interest. Residents of California, New York, New Jersey, and other high-tax states benefit significantly from Treasury fund state tax exemption.

Money Market vs Alternatives

Money Market Funds vs High-Yield Savings Accounts (HYSAs): Money market funds typically offer higher yields than HYSAs during periods of rising rates because they adjust faster. However, HYSAs are FDIC insured up to $250,000 per depositor per bank, while money market funds are not insured and could lose value. Money market funds may take 1-2 business days to access (you sell shares and the proceeds settle), while HYSAs offer instant transfers between accounts at the same bank and typically next-day ACH transfers. A money market fund held at a brokerage can be swept directly into a checking account or used for check-writing, while HYSAs have more limited transaction capabilities (six withdrawals per month was a rule, though many banks no longer enforce it). Compare with HYSAs.

Money Market Funds vs CDs: Money market funds offer daily liquidity — you can withdraw any amount at any time without penalty. CDs lock up your money for a fixed term (3 months to 5 years) and charge an early withdrawal penalty (typically 3-12 months of interest) if you need the money before maturity. However, CDs offer a fixed rate for the term, protecting you from rate declines, while money market fund yields fluctuate with the market. CD rates are also FDIC insured up to $250,000. For a comparison, see CD ladder vs money market guide.

Money Market Funds vs T-Bills: Both are considered extremely safe. T-bills offer slightly higher yields than money market funds because the fund's expense ratio reduces the net yield. However, money market funds provide automatic reinvestment of dividends and daily liquidity in any dollar amount. T-bills mature in fixed increments (typically $1,000) and require manual reinvestment at auction, though you can sell them early on the secondary market. For large cash holdings, a ladder of individual T-bills can be more cost-effective than a money market fund. See T-bill investing guide.

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