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Mutual Fund Education

Understanding the Shadow Price of a Money Market Fund

Ajay Singh Feb 06, 2018


Subsequently, the U.S. Securities and Exchange Commission (SEC) introduced new rules and regulations to reduce the risks associated with money market funds. The enhanced disclosure requirements for the “shadow price,” or the market-based price of the fund portfolio introduced in January 2011, were a part of this wider money market fund reform.

In this article, we will examine what a shadow price is and the implications of the SEC ruling for investors.

Check out our Money Market Fund section to keep up to date with the mutual fund industry.


What Is a Shadow Price?


A money market fund invests in the highest-rated short-term debt securities, which mature in less than 13 months, such as U.S. Treasury bills and commercial paper. Since the market value of these securities is affected by changes in interest rates, maturity and credit quality, the shadow price of the fund deviates from the $1 per-share value. SEC’s rules and regulations on the quality and maturity of the securities in the fund reduce the interest rate, credit and liquidity risks of the money market funds. This ensures that the shadow price deviates in a very narrow range enabling the fund to maintain a stable NAV of $1 per share.

SEC has mandated the use of floating NAV by institutional prime money market funds. Learn about floating NAV here.


Shadow Price vs. Daily NAV Per Share


In order to understand how NAV is determined, click here.


Implications for Investors


The enhanced disclosure requirements for shadow prices allow investors to have more information on a fund’s investments and its shadow price, enabling them to better evaluate the money market funds.

To familiarize yourself with regulations governing the mutual fund industry, read about the Investment Company Act of 1940.


Disclosure Requirements



The Bottom Line


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