Money market funds

A money market fund sits in the short-term corner of the debt world, alongside liquid and ultra-short and low-duration funds. What sets it apart is not how long it lends for but what it lends through: it is defined by the kind of instruments it holds.

What money-market instruments are

“Money market” is the name for the market in very short-term borrowing. The instruments include treasury bills issued by the government, commercial paper issued by companies, and certificates of deposit issued by banks — each a short-term promise to repay with interest, generally maturing within about a year. A money market fund holds a spread of these.

Defined by what it holds, not how long

This is the distinction worth grasping. Liquid, ultra-short and low-duration funds are defined by duration bands — how long, on average, their holdings have left to run. A money market fund is defined instead by the type of instrument in it. In practice it belongs to the same short-horizon family, but the category rule points at the instrument rather than the calendar.

Where it sits

Its horizon is short — typically money for a few months up to around a year, longer than you would leave in a liquid fund but still short. That is a description of where the category sits, not a suggestion about your own money, which depends on your horizon and needs.

Short is not free of risk

The instruments carry credit risk — a company or bank behind the paper can be downgraded — and the up-to-a-year maturities carry a little interest-rate risk too. The value is not fixed and can fall. It is low on the volatility scale, not off it — the same “steadier is not safe” point that runs through the whole debt category.