Money Market Funds
A money market fund invests in a pool of short-term, interest-bearing securities. A money market instrument
is a short-term IOU issued by the U.S. government, U.S. corporations, and state and local governments.
Money market instruments have maturity dates of less than 13 months. These instruments are relatively stable
because of their short maturities and high quality.
Money market funds are most appropriate for short-term investment and savings goals or in situations where
you seek to preserve the value of your investment while still earning income. In general, money market funds
are useful as part of a diversified personal financial program that includes long-term investments.
Money Market Fund Risks
The short-term nature of money market investments makes
MAINTAINING A STABLE $1 SHARE PRICE
money market funds less volatile than any other type of fund.
IS A GOAL OF MOST MONEY MARKET
Money market funds seek to maintain a $1-per-share price to
FUNDS. HOWEVER, THERE IS NO
preserve your investment principal while generating dividend
GUARANTEE THAT YOU WILL RECEIVE
income. $1 PER SHARE WHEN YOU REDEEM
To help preserve the value of your principal investment, money
market funds must meet stringent credit quality, maturity, and
diversification standards. Most money market funds are required to invest at least 95 percent of their assets
in U.S. Treasury issues and privately issued securities carrying the highest credit rating by at least two of the
five major credit rating agencies. A money market fund generally cannot invest in any security with a maturity
greater than 397 days, nor can its average maturity exceed 90 days. All of these factors help minimize risk.
However, money market funds do not guarantee that you will receive all your money back. Money market
funds are not insured by the U.S. government.
“Inflation risk”—that is, the risk your investment return fails to keep pace with the inflation rate—is another
concern if you choose to invest in money market funds or any other short-term investments. See page 17 for a
broader discussion of inflation risk.
Types of Risk
After a bond is fi rst issued, it may be traded. If a bond is traded before it matures, it may be worth more
or less than the price paid for it. The price at which a bond trades can be affected by several types of risk.
In t er es t R at e R isk : Think of the relationship between bond prices and interest rates as opposite ends
of a seesaw. When interest rates fall, a bond’s value usually rises. When interest rates rise, a bond’s value
usually falls. The longer a bond’s maturity, the more its price tends to fluctuate as market interest rates
change. However, while longer-term bonds tend to fluctuate in value more than shorter-term bonds, they also
tend to have higher yields (see page 16) to compensate for this risk.
Unlike a bond, a bond mutual fund does not have a fi xed maturity. It does, however, have an average portfolio
maturity—the average of all the maturity dates of the bonds in the fund’s portfolio. In general, the longer a
fund’s average portfolio maturity, the more sensitive the fund’s share price will be to changes in interest rates
and the more the fund’s shares will fluctuate in value.
Cr edi t R isk : Credit risk refers to the “creditworthiness” of the bond issuer and its expected ability to
pay interest and to repay its debt. If a bond issuer is unable to repay principal or interest on time, the bond
is said to be in default. A decline in an issuer’s credit rating, or creditworthiness, can cause a bond’s price to
decline. Bond funds holding the bond could then experience a decline in their net asset value.
Pr epay men t R isk : Prepayment risk is the possibility that a bond owner will receive his or her
principal investment back from the issuer prior to the bond’s maturity date. This can happen when
interest rates fall, giving the issuer an opportunity to borrow money at a lower interest rate than the one
currently being paid. (For example, a homeowner who refi nances a home mortgage to take advantage of
decreasing interest rates has prepaid the mortgage.) As a consequence, the bond’s owner will not receive
any more interest payments from the investment. This also forces any reinvestment to be made in a
market where prevailing interest rates are lower than when the initial investment was made. If a bond
fund held a bond that has been prepaid, the fund may have to reinvest the money in a bond that will have
a lower yield.