Yes, you can lose money in a money market fund, though it is rare and usually small

Money market funds are not the same as money market accounts. A money market fund is an investment — you own shares in a fund that holds short-term debt like Treasury bills and commercial paper. Money market accounts are bank products insured by the FDIC. The distinction matters because funds can lose value; accounts cannot (up to the FDIC limit).

The most common way to lose money in a money market fund is through a decline in the fund's share price, called net asset value (NAV). When the bonds and short-term securities the fund holds drop in value — usually because interest rates rise — the fund's NAV falls. If you sell shares when the NAV is lower than when you bought them, you realize a loss. You can also lose money to fees: expense ratios, transaction costs, and advisory fees all reduce your returns.

A second, rarer scenario is a break the buck event, where the fund's NAV falls below $1.00 per share. This happened to some funds during the 2008 financial crisis. When it occurs, you lose principal. The SEC has since added rules to reduce this risk, but it remains theoretically possible.

Key Takeaways

  • Money market funds can lose value when interest rates rise or when the securities they hold decline in price, and you lose money if you sell at that lower price.
  • Fees charged by the fund — typically 0.2% to 0.5% annually — reduce your returns even in years when the fund's value stays stable.
  • A break the buck event, where a fund's share price falls below $1.00, is rare but possible and results in permanent loss of principal.
  • Money market accounts at banks are FDIC-insured and cannot lose value, making them safer than money market funds if capital preservation is your only goal.

How interest rate changes shrink a money market fund's value

Money market funds hold bonds and short-term debt that mature in less than one year. When you own a bond and interest rates rise, the bond's market value falls — because new bonds now pay higher rates, making your lower-paying bond less attractive. If the fund holds bonds that have fallen in value, the fund's NAV per share declines.

This loss is only realized — meaning you actually lose money — if you sell your shares when the NAV is depressed. If you hold the shares until the bonds mature or rates fall again, you may recover the loss. But if you need the money during a period of rising rates, you will sell at a loss.

The longer the average maturity of the bonds in the fund, the bigger the price swing when rates change. A fund holding mostly 6-month Treasury bills will see smaller NAV swings than a fund holding 11-month commercial paper, though both are still considered short-term.

Fees that quietly reduce your balance

Every money market fund charges an expense ratio — an annual percentage of your balance that covers management, administration, and other costs. Expense ratios for money market funds typically range from 0.2% to 0.5% per year, though some are higher and a few are lower. A fund charging 0.4% annually will reduce your balance by that amount each year, regardless of whether the fund's value goes up or down.

Some funds also charge transaction fees when you buy or sell shares, or redemption fees if you withdraw money within a certain period. These are less common in modern money market funds, but they can appear in older funds or those sold through advisors. Always check the fund's prospectus for the fee schedule before you invest.

Over time, fees compound. A fund earning 4% annually but charging 0.5% in fees nets you 3.5%. Over 10 years, that 0.5% difference adds up significantly compared to a lower-cost fund earning the same 4% before fees.

What a break the buck event means and how rare it is

A break the buck event occurs when a money market fund's NAV falls below $1.00 per share. This means the fund has lost money on its holdings and cannot cover the loss through its own capital. When this happens, all shareholders lose principal proportionally.

The most famous example is the Reserve Primary Fund in September 2008, which held debt from Lehman Brothers. When Lehman collapsed, the fund's value fell below $1.00, and shareholders lost money. This triggered a broader panic in money market funds and led the SEC to implement new rules.

Since 2010, the SEC has required money market funds to hold higher-quality securities, maintain larger cash reserves, and limit their exposure to any single issuer. These rules have made break the buck events much less likely, but they remain possible during severe financial crises. The risk is lowest in government money market funds, which hold only Treasury securities and are backed by the U.S. government.

The difference between money market funds and money market accounts

A money market account is a bank savings product insured by the FDIC up to $250,000. Your balance cannot fall below what you deposited (minus withdrawals), no matter what happens in the financial markets. You earn interest, but you cannot lose principal.

A money market fund is an investment product with no FDIC insurance. Your balance can fall if the fund's holdings decline in value or if fees exceed your earnings. The tradeoff is that money market funds sometimes offer slightly higher yields than money market accounts, especially when interest rates are low.

If you want zero risk of losing money, choose a money market account. If you can tolerate small losses in exchange for potentially higher returns, a money market fund may make sense — but only if you do not need the money during a period of rising interest rates.

When rising interest rates hurt money market funds most

Money market funds are most vulnerable to losses during periods when the Federal Reserve is raising interest rates. As rates climb, the bonds and short-term securities the fund holds become less valuable because new securities pay higher rates. The fund's NAV falls.

The pain is sharpest if you need to withdraw money during this period. You are forced to sell shares at a depressed NAV and lock in a loss. If you can wait for rates to stabilize or fall, the fund's value may recover.

Falling interest rates have the opposite effect — they boost the value of existing bonds, raising the fund's NAV. But money market funds are designed for stability, not growth, so even in favorable rate environments they do not produce large gains.

How to reduce the risk of losses in a money market fund

Choose a government money market fund that holds only U.S. Treasury securities. These funds carry the lowest credit risk because they are backed by the federal government. They are less likely to experience sharp NAV declines than funds holding corporate debt.

Check the fund's expense ratio and choose the lowest-cost option available to you. A difference of 0.2% per year may seem small, but it compounds over time. Many brokerages offer money market funds with expense ratios below 0.1%.

Avoid selling during periods of rising interest rates if you can. If you know you will need the money within a specific timeframe, consider a money market account instead — the FDIC insurance eliminates the risk of loss, even if the yield is slightly lower.

Review the fund's holdings and average maturity. A fund with a shorter average maturity (closer to 30 days) will experience smaller NAV swings when rates change than a fund with a longer maturity (closer to 120 days).

Frequently Asked Questions

Can I lose all my money in a money market fund?

No. Even in a break the buck event, you lose only the amount the fund's value fell below $1.00 per share. You do not lose your entire balance. The worst-case scenario is a loss of a few cents per share, not a total wipeout. Government money market funds, which hold only Treasury securities, carry virtually no risk of any loss.

Is a money market fund safer than a savings account?

No. A savings account at a bank is FDIC-insured and cannot lose value. A money market fund is not insured and can decline in value. If safety is your priority, choose a money market account or a high-yield savings account instead of a money market fund.

What happens to my money market fund if the stock market crashes?

Money market funds do not hold stocks, so a stock market crash does not directly affect them. However, a severe financial crisis can cause the bonds and short-term debt the fund holds to decline in value. During the 2008 crisis, some money market funds experienced losses, though most did not.

Do I pay taxes on losses in a money market fund?

No. You do not owe taxes on investment losses. If you sell shares at a loss, you can use that loss to offset capital gains from other investments. Keep records of your purchase price and sale price to document the loss for tax purposes.

Should I move my money market fund to a money market account?

If you need the money within the next year or two and cannot tolerate any risk of loss, yes. If you can leave the money untouched for several years and interest rates are expected to fall or stay stable, a money market fund may offer slightly better returns. Compare the current yield on both options and consider your timeline before deciding.