Money Market Funds: Safety, Liquidity, and Returns Explained

Money Market Funds: Safety, Liquidity, and Returns Explained

Nov, 4 2025 • 5 Categories: Investing

MMF vs Savings Account Calculator

Compare your current savings account earnings with money market fund returns. As of November 2023, taxable money market funds averaged 5.08% yield compared to 0.46% for average savings accounts. See how much more you could earn by moving your cash to a safe, liquid investment.

Results

Important Note: Money market funds are not FDIC-insured but are extremely low-risk. Government MMFs have never lost money in modern regulatory history and typically yield 5% or more. Your savings account is FDIC-insured up to $250,000.

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.

An investor gives cash to a cosmic guardian shielded by SEC rules, with MMFs as friendly UFOs.

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
A savings account with a weak flame vs. a vibrant money market fund bursting with golden coins.

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.

Are money market funds FDIC-insured?

No, money market funds are not FDIC-insured. They are investment products, not bank deposits. While they are extremely low-risk and have historically maintained a stable $1.00 share price, there is no government guarantee. The risk of losing principal is minimal - especially with government MMFs - but it is not zero.

Can I lose money in a money market fund?

Technically, yes - but it’s extremely rare. Since 1970, only three money market funds have ever dropped below $1.00 per share. Only one caused actual investor losses, back in 2008. Since the SEC strengthened rules in 2014, government MMFs have had zero instances of loss. Prime MMFs carry slightly more risk, but still remain among the safest investments available.

How do money market funds compare to savings accounts?

Money market funds typically offer yields 10 times higher than the average savings account. As of late 2023, MMFs averaged 5.08% while savings accounts paid 0.46%. MMFs also offer same-day liquidity and often no minimum balance. However, savings accounts are FDIC-insured up to $250,000, while MMFs are not. For most people, MMFs are better for cash you don’t need immediately but want to earn more on.

What’s the difference between government and prime MMFs?

Government MMFs invest only in U.S. Treasury securities and federal agency debt - making them the safest option. Prime MMFs invest in corporate debt like commercial paper from companies like Apple or Coca-Cola. Prime funds usually yield 0.1% to 0.2% more, but carry slightly higher credit risk. For most retail investors, government MMFs are the better choice unless you’re seeking slightly higher income and understand the trade-off.

Should I use a money market fund for long-term investing?

No. Money market funds are designed for short-term cash management, not long-term growth. Over the past decade, they returned an average of just 1.15% annually. The S&P 500 returned 9.5% over the same period. If you’re investing for retirement or goals more than 3-5 years away, use low-cost index funds or ETFs. MMFs are for parking cash, not building wealth.

How do I get started with a money market fund?

Open an account with a major provider like Vanguard, Fidelity, or Charles Schwab. Choose a government MMF if you want maximum safety. Look for funds with low expense ratios (under 0.20%) and no minimum balance. Transfer money from your bank account - most platforms allow same-day or next-day transfers. Monitor the yield monthly, as it changes with interest rates, but you don’t need to actively trade it.

Tags:

5 Comments

  • Image placeholder

    RAHUL KUSHWAHA

    November 17, 2025 AT 01:40
    Just moved my emergency fund to VMFXX last month. 5.1% yield and I can pull it out in 10 mins via the app. No more watching my savings account earn less than my coffee budget. 😊
  • Image placeholder

    Julia Czinna

    November 17, 2025 AT 20:57
    I appreciate how clearly this breaks down the risks. I used to think MMFs were FDIC-insured until I read this. Now I’ve shifted all my short-term savings into government MMFs-no jargon, no fluff, just facts. Thank you for the clarity. 🙏
  • Image placeholder

    Laura W

    November 18, 2025 AT 02:00
    OMG I just realized I’ve been leaving $500/year on the table by keeping cash in my bank. 🤯 Government MMF = instant upgrade. Schwab’s got a $0 min one with 5.05%-why are we even talking about savings accounts anymore? This is low-effort, high-reward finance 101. 🚀
  • Image placeholder

    Graeme C

    November 19, 2025 AT 13:14
    Let’s be real-anyone still using a savings account in 2025 is either deeply naive or actively choosing to lose money. The SEC’s 2014 reforms made government MMFs safer than your local bank vault. Prime funds? Fine if you’re a hedge fund. But for the rest of us? Government MMF is the only rational choice. Stop overthinking it.

    And yes, the 0.47% expense ratio on retail shares is a scam. Go institutional. Or better yet, use Schwab’s zero-minimum fund. It’s not rocket science-it’s arithmetic.
  • Image placeholder

    Astha Mishra

    November 21, 2025 AT 10:52
    It is fascinating to consider the philosophical underpinnings of liquidity in modern finance-how we have come to treat cash not as a static reserve but as a dynamic, yield-generating instrument that must remain perpetually mobile. The notion that money can be both safe and productive simultaneously challenges classical economic paradigms, yet here we are, witnessing the quiet revolution of the money market fund as the de facto arbiter of prudent capital stewardship. One might even say that in an era of inflationary uncertainty and volatile markets, the MMF represents not merely a financial tool, but a psychological anchor-a quiet affirmation that stability is still attainable, even if it is not insured by the state. And yet, one must ask: does the illusion of safety, however statistically robust, truly equate to security? Or are we merely trading the certainty of FDIC guarantees for the comforting myth of historical precedent? Still, for now, I shall keep my emergency fund in FDRXX… and quietly hope that the algorithms remain kind.

Write a comment