F121. Money Market Mutual Funds

Federal Reserve definition for F121 flow of funds table

Money market mutual funds are investment companies that invest in short-term, liquid assets in order to provide money-market rates of return to investors.

They are open-end investment companies that are allowed to issue and unlimited number of shares and are required to redeem all shares at net asset value.

These funds were introduced during the 1970s. Money market mutual funds may be general funds or may specialize in municipal securities, which provide income exempt from federal taxes; they may also specialize in either institutional or 'retail' (individual investor) clientele.

All money market funds must comply with Rule 2a-7 of the Investment Company Act of 1940, which seeks to limit the risk of money market funds.

The rule places restrictions on the average maturity of a fund's portfolio (ninety days or less), on the proportion of its securities holdings with less than the highest rating (no more than 5 percent of assets), and on the concentration of the fund's assets in the securities of any single issuer (no more than 5 percent of assets).

Because many money market funds allow their investors to write checks against their accounts, balances in the funds are components of the monetary aggregates (measures of the national money supply published by the Federal Reserve Board); fund balances are not insured by any federal agency, however.

These funds maintain a fixed net asset value per share, usually one dollar, and distribute income daily in the form of fractional shares.

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