Money you’ll need soon shouldn’t ride stock market roller coasters, but leaving it in a rock-bottom savings account also hurts.

Money market funds sit in the middle: conservative investment vehicles that aim to preserve your cash, pay a competitive yield, and still let you move money quickly when plans change.

What They Are

Money market mutual funds invest in very short-term, high-quality debt—things like Treasury bills, government-backed repurchase agreements, commercial paper, and certificates of deposit issued by large institutions. They’re designed to be steady, not exciting. Most target a stable net asset value (NAV) of $1 per share and distribute income as dividends, usually daily and paid out monthly.

They’re different from money market accounts at banks. A money market account is a deposit product, usually FDIC-insured. A money market fund is a security, bought through a brokerage or fund company, and is not deposit-insured.

Main Fund Types

Most money market funds fall into three broad buckets: government, municipal, and prime. Each uses a different slice of the short-term debt market and carries its own mix of risk, yield, and tax traits. Government funds invest mainly in U.S. government securities and fully collateralized repurchase agreements. Treasury-only funds are an even narrower subset, holding just Treasury bills, notes, and bonds. These are generally viewed as the safest money market option.

Municipal funds focus on short-term debt issued by state and local entities. In many cases, the income is exempt from federal income tax and sometimes from state tax if you live where the bonds are issued. That tax advantage can make them attractive for higher-bracket investors, even if the headline yield looks slightly lower.

Prime funds invest in high-quality corporate and financial institution paper—commercial paper, CDs, and similar instruments. They often offer higher yields than government funds but carry slightly more credit and liquidity risk. For conservative cash, many investors stick with government or Treasury funds and use prime only if comfortable with that trade-off.

How They Work

A fund company pools money from many investors, then uses it to build a diversified portfolio of money market securities that fit the fund’s mandate. Professional managers handle security selection, maturity management, and compliance with regulatory limits on maturity and credit quality. The portfolio generates interest income, which is passed through to shareholders as dividends. Because underlying holdings are short term, yields can adjust relatively quickly as interest rates move, unlike older bonds locked in at lower rates.

Most retail money market funds strive to keep the NAV at $1. In normal conditions, small price fluctuations are absorbed in the daily yield. Extremely rare stress events can cause a fund to “break the buck” and price below $1, which is why regulators require strict risk controls.

Who They Suit

Money market funds work best for short-term and “parking” needs—goals measured in months, not decades. Think emergency reserves inside a brokerage account, cash earmarked for a home down payment next year, or funds waiting on the sidelines for the right investment opportunity.

They’re also useful as the default “sweep” vehicle in many brokerage accounts. Dividends, interest, and sale proceeds can automatically flow into a money market fund instead of sitting idle with zero yield.

Investors who expect stock-like returns will be disappointed. These funds aim to preserve principal and earn modest income, not to outgrow inflation over many years.

Pros And Cons

On the plus side, money market funds are highly liquid—you can usually sell shares and move cash to a linked bank account within a day or two. Volatility is typically very low, and yields often beat traditional savings and basic checking accounts when rates are elevated. They’re also subject to regulatory oversight. U.S. money market funds must follow Securities and Exchange Commission rules on allowable maturities, credit quality, and diversification, which helps limit risk.

The trade-offs: they are not insured by the FDIC or NCUA, so they don’t carry the same guarantee as a bank deposit. Yield isn’t fixed and can drop quickly when short-term rates fall. After expense ratios, returns may lag inflation, so they’re not a long-term wealth-building engine.

How To Invest

Step one is access. Open a brokerage account or use an existing one at a reputable firm. Most accounts can be opened online in minutes with basic identification and income information. Next, decide how much you want to keep in a money market fund based on your short-term needs and overall cash strategy. Many funds have minimums ranging from $0 to several thousand dollars, so match that to your available amount.

Then, choose the fund and place a buy order in your brokerage interface, just like you would for any mutual fund. You can opt to have dividends paid out in cash or automatically reinvested into more shares, depending on whether you want income now or slightly higher compounding over time.

Choosing A Fund

Start with fund type: government or Treasury funds for maximum safety, municipal funds if you’re in a high tax bracket, and prime funds only if you’re comfortable with marginally higher risk for extra yield. Look closely at the 7-day SEC yield. This standardized measure approximates the fund’s recent income rate and lets you compare options. Remember to think in after-fee terms: subtract the expense ratio to estimate what you actually keep.

Expense ratios matter a lot because yields are modest to begin with. Many strong funds charge under 0.10%. Paying several times that rarely buys meaningfully better performance; it just shrinks your return. Check minimum investment levels and confirm that the brokerage is a member of the Securities Investor Protection Corporation (SIPC). SIPC doesn’t protect against market losses, but it does help safeguard your securities and cash if the brokerage itself fails.

Taxes And Alternatives

Dividends from taxable money market funds are generally taxed as ordinary income in the year you receive them. Municipal fund income may be exempt from federal tax and sometimes state tax, making it attractive to higher-income investors. If minimizing taxes is a priority, consider pairing money market funds with strategies like holding more cash inside tax-advantaged accounts or using municipal bond funds where appropriate. A tax professional can help fine-tune this mix.

Alternatives can play a similar role. High-yield savings accounts offer FDIC insurance and currently competitive rates, though they live at banks rather than inside brokerage accounts. Certificates of deposit lock your money for a fixed term in exchange for guaranteed rates. Very conservative investors may prefer these insured options over funds that can fluctuate, even slightly.

Conclusion

Money market funds shine as a parking spot for cash you might need soon: more yield than a basic account, less drama than stocks or long-term bonds, and easy access when life happens. Used thoughtfully, they can anchor an emergency reserve or serve as a staging area for future investments. Looking at your own finances, what slice of your cash would benefit most from earning a bit more while still staying within easy reach?