Money Market Funds: Safety, Liquidity, and Returns Explained

When you need your money to be safe, accessible, and earning more than a regular savings account, money market funds often come up as a top choice. But are they really as safe as people say? Do they deliver on returns? And can you actually get your cash out when you need it? Let’s cut through the noise and look at what money market funds actually do - and whether they fit your needs right now.

What Exactly Is a Money Market Fund?

A money market fund (MMF) is a type of mutual fund that buys short-term, low-risk debt. Think U.S. Treasury bills, certificates of deposit from big banks, and IOUs from major corporations. These aren’t stocks. They’re not bonds with long maturities. They’re the kind of IOUs that companies and the government issue for just a few days or weeks - and they pay interest while they’re outstanding.

The goal? Keep your money worth exactly $1.00 per share. That’s the standard. Most MMFs use a method called amortized cost accounting to make sure your balance doesn’t jump around. Even if the value of the underlying assets dips a tiny bit, the fund smooths it out so you don’t see the noise. It’s designed to feel like cash - but earn more than cash.

There are three main types:

• Government MMFs: Only invest in U.S. Treasury securities and agency debt. These are the safest.
• Prime MMFs: Invest in corporate debt like commercial paper from companies like Apple or Coca-Cola. Slightly higher risk, slightly higher yield.
• Tax-Exempt MMFs: Buy municipal bonds from state and local governments. Interest is usually free from federal taxes - and sometimes state taxes too, if you live in the issuing state.

How Safe Are Money Market Funds?

Here’s the big question: Are they FDIC-insured? No. That’s critical. Your bank savings account is protected up to $250,000 by the FDIC. Money market funds are not. They’re investment products. That means, in theory, you could lose money.

But in practice? It almost never happens.

Since the first MMF launched in 1970, only three funds have ever “broken the buck” - meaning their share price fell below $1.00. Only one of those resulted in actual losses for investors. That was back in 2008, during the financial crisis, when a fund tied to Lehman Brothers collapsed. Since then, the SEC tightened the rules dramatically.

Today, Rule 2a-7 forces MMFs to:

• Keep their portfolio’s average maturity under 60 days
• Limit any single issuer to no more than 5% of the fund (except for U.S. government debt)
• Hold at least 30% of assets in assets that can be sold within a week
• Use mark-to-market pricing for institutional prime funds (so you see small price changes, not fake stability)

Government MMFs, which hold only U.S. Treasuries, have never lost money in the modern regulatory era. BlackRock’s data shows a 99.98% probability of maintaining $1.00 NAV over 30 years. That’s not just safe - it’s nearly bulletproof.

How Liquid Are They?

Liquidity is where MMFs really shine. You can usually withdraw your money the same day you request it. Many platforms let you transfer funds directly to your checking account in under 24 hours.

That’s why companies use them. Over 90% of Fortune 500 firms keep their operating cash in MMFs. Why? Because they need to pay payroll, suppliers, or emergency bills on short notice. MMFs give them yield without locking up cash.

Retail investors use them the same way. During the March 2023 regional bank failures, people moved $50,000+ into Vanguard’s Federal Money Market Fund (VMFXX) because they knew they could pull it out fast - and earn 4.8% while waiting. That’s a huge upgrade from a 0.5% savings account.

But here’s a caveat: During extreme market stress, like the repo market crunch in September 2019, some funds temporarily delayed redemptions. That wasn’t a freeze - it was a 2-day settlement delay. Still, it caught some investors off guard. If you need cash within hours, keep a little in a checking account. For emergencies needing cash in a day or two? MMFs are perfect.

What Returns Can You Expect?

Returns are the main reason people choose MMFs over bank accounts.

As of November 2023, taxable MMFs were averaging 5.08% in yield. Compare that to the national average savings account rate of 0.46%. That’s more than 10 times the return - with almost zero extra risk if you stick to government funds.

Prime MMFs often yield 10-20 basis points more than government funds - but that extra yield comes with slightly higher credit risk. Morningstar warns that when rates climb above 4%, many investors chase that extra return without realizing government MMFs have zero history of default.

Tax-exempt MMFs can be even more attractive if you’re in a high-tax state. In California, where the top income tax rate is 13.3%, a tax-exempt MMF yielding 4.5% might be equivalent to a taxable fund paying over 5.1% after taxes.

But here’s the catch: MMFs don’t grow wealth. They preserve it. Over the past 10 years, the average annual return of MMFs was just 1.15%. The S&P 500 returned 9.5%. So if you’re investing for retirement in 20 years? MMFs aren’t the tool. But if you’re saving for a house down payment next year? Or building an emergency fund? They’re ideal.

Who Should Use Them - And Who Should Avoid Them?

Use MMFs if you:

• Need cash you can access in 1-2 days
• Want to earn more than a savings account without taking stock market risk
• Are saving for a near-term goal (under 1 year)
• Are retired and need predictable, low-volatility income
• Work for a company that uses MMFs for payroll or operating cash

Avoid MMFs if you:

• Want long-term growth (use index funds instead)
• Think they’re FDIC-insured (they’re not)
• Need guaranteed returns - MMF yields change daily with interest rates
• Want to time the market - MMFs aren’t for speculation

How to Choose the Right One

Start with your tax situation and risk tolerance.

• If you’re risk-averse and live in any state: Go with a Government MMF. Fidelity Government Cash Reserves (FDRXX) and Vanguard Federal Money Market (VMFXX) are two of the largest and most stable.
• If you’re in a high-tax state and want tax-free income: Look at a Tax-Exempt MMF from your state’s issuer. Schwab offers one for California residents with no minimum balance.
• If you’re okay with slightly more risk for a bit more yield: Try a Prime MMF - but only if you understand the difference.

Watch these three things:

• Expense ratio: Institutional shares average 0.15%. Retail shares can be 0.47%. Lower fees = more of your yield stays yours.
• Minimum investment: Many funds now have $0 minimums. Schwab’s MMF account requires nothing to start.
• Historical stability: Check if the fund ever broke the buck. Government funds? Never. Prime funds? Rarely - but check.

What’s Changing in 2025?

The SEC is pushing new rules to make MMFs even more resilient. By mid-2024, all funds will need to use “swing pricing” - a mechanism that adjusts the share price slightly during big sell-offs so the remaining investors don’t get stuck paying for losses. This is meant to prevent panic-driven runs.

The Federal Reserve now treats MMFs as eligible counterparties in its emergency lending programs - meaning they’re officially part of the financial safety net.

J.P. Morgan predicts MMF assets will hit $6.8 trillion by 2025. Why? Because interest rates are still higher than they’ve been in 15 years. Banks haven’t caught up. And investors are waking up to the fact that cash doesn’t have to sit idle.

Final Take: Are Money Market Funds Worth It?

Yes - if you know what they are.

They’re not a growth tool. They’re not a savings account replacement with insurance. But they are the best way to earn meaningful interest on cash you need to keep safe and ready to use.

If you’re holding $10,000 in a 0.5% savings account right now, you’re leaving $450 a year on the table. Move it to a government MMF at 5.08%, and you earn that $450 - with no risk of loss, and same-day access.

The only thing standing between you and that extra income is understanding the difference between safety and insurance. Once you get that, money market funds become one of the simplest, smartest moves you can make with your cash.