Types of Money Market Funds

Seasoned mutual fund investors are very familiar with money market funds (MMFs). Developed in the 1970s, MMFs give investors the option of purchasing a pool of securities that typically generate higher returns than interest-bearing bank accounts.

The size, scope, and availability of MMFs have grown exponentially over the past four decades. As a result, there are many kinds of MMFs that give investors exposure to all types of fixed income instruments, including government securities, tax-exempt municipal securities, and corporate debt securities.

For the purpose of this article, we will break down MMFs into three categories: prime, government, and tax-exempt. In all these cases, MMFs are regulated by the U.S. Securities and Exchange Commission (SEC).

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Prime Money Market Funds

Prime funds are MMFs that invest primarily in corporate debt securities. Since 2014, prime funds have been further divided into two categories that reflect the type of investor accessing them: Prime Retail, which maintains a stable net asset value per share, and Prime Institutional, which has a floating net asset value per share.

As of May 31, 2019, more than $1 trillion in assets under management (AUM) were held in prime funds, according to the SEC’s latest MMF Statistics report. More than 60% of the total was held in Prime Institutional funds. Examples of prime money market funds include the Vanguard Prime Money Market Fund (VMMXX) and the BlackRock Liquidity FedFund Administration (BLFXX).

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Government Money Market Funds

The Office of Financial Research (OFR) classifies Treasury, Government/Agency, and Tax Exempt Government asset categories as Government funds. In each case, Government funds allocate most of their assets in cash, government securities, and repurchase agreements that are backed by these securities.

Government money market funds underwent a definitional change in 2014. As a result, these funds now have the option of omitting liquidity fees and redemption gates. Both tools are used by fund managers to discourage investors from withdrawing their assets. Government funds that employ liquidity fees and redemption gates are classified as ‘Government (Fees and Gates)’ funds.

Government money market funds were valued at more than $2.4 trillion as of May-end 2019. Examples of government money market funds include American Century Capital Preservation Fund (CPFXX) and the Fidelity Government Money Market Fund (SPAXX).

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Tax-Exempt Funds

Money market funds that invest primarily in securities exempt from local income taxes are referred to as tax-exempt funds. Under usual circumstances, tax-exempt funds are issued by local governments and other municipal organizations.

Since 2014, tax-exempt funds have been divided into two categories based on investor type. Funds that are designed for individual investors are called Tax Exempt Retail, which is allowed to maintain a stable net asset value per share. All other tax-exempt funds are called Tax Exempt Institutional and have a floating net asset value per share.

As of May 31, 2019, tax-exempt funds had nearly $140 billion in assets under management, with more than 90% being held in retail funds.

Examples of tax-exempt money market funds include the Vanguard Municipal Money Market Fund (VMSXX) and the T. Rowe Price Summit Municipal Income Fund (PRINX).

The Bottom Line

Regulations surrounding MMFs have undergone several revisions since the 2008 financial crisis. Money market funds today typically carry less interest rate, credit, and liquidity risks than before the crisis. The SEC hasn’t ruled out additional regulatory changes as the market for MMFs continues to evolve.

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