Money market funds can lose money, but the risk is usually small and depends on what you own

A money market fund holds short-term debt — mostly Treasury bills, commercial paper, and bank certificates of deposit that mature in less than a year. Because these are safer than stocks and bonds, money market funds rarely lose value. But they are not may provide. If the borrowers default or interest rates move sharply, the fund's share price can drop below $1.00, which means you lose money on your balance.

The most famous example happened in 2008, when the Reserve Primary Fund "broke the buck" — its share price fell to $0.97 — after Lehman Brothers collapsed and the fund held their commercial paper. Investors lost 3 cents on every dollar. Since then, the Securities and Exchange Commission (SEC) has tightened rules on what money market funds can hold and how they must price their shares, which has made losses much rarer.

The real risk today is smaller than it was fifteen years ago, but it is not zero. You should understand the difference between a money market fund and a money market account, because they have different protections.

Key Takeaways

  • Money market funds are mutual funds that hold short-term debt, and their share price can fall below $1.00 if borrowers default or market conditions shift sharply.
  • Money market accounts are bank products covered by FDIC insurance up to $250,000 per depositor per bank, so they cannot lose money due to market moves.
  • SEC rules since 2010 require money market funds to hold only the highest-quality short-term debt and to price shares daily, which reduces but does not eliminate loss risk.
  • During normal market conditions, money market funds have lost money only a handful of times in the past fifty years, but the risk rises during financial crises.

How money market funds are priced and when they lose value

A money market fund's share price is supposed to stay at $1.00. Every day, the fund manager marks each holding to its current market value and adjusts the share price to reflect that. If a Treasury bill is worth slightly less today than yesterday, the share price drops a fraction of a cent. If interest rates rise, older bonds in the portfolio become less valuable, and the share price falls.

Most of the time, these daily moves are tiny — a few hundredths of a cent. But if something breaks in the credit markets, the fund can lose more. When Lehman Brothers failed in September 2008, money market funds that held Lehman's commercial paper suddenly owned paper worth nothing. The Reserve Primary Fund had about $785 million in Lehman exposure and could not absorb the loss, so its share price fell to $0.97.

A loss becomes permanent when you sell your shares. If you hold the fund and the price recovers, you do not lock in the loss. But if you need the money while the price is down, you sell at a loss.

The difference between money market funds and money market accounts

This distinction matters because the two products have completely different protections. A money market account is a bank deposit product. It is covered by FDIC insurance up to $250,000 per depositor per bank. Your balance cannot go down because of market moves or borrower default — the bank guarantees it. You earn interest, and the rate may be variable, but your principal is safe.

A money market fund is a mutual fund. It is not FDIC-insured. Your money is invested in securities, and if those securities lose value, so does your balance. The SEC requires the fund to hold only high-quality short-term debt, but "high-quality" does not mean "risk-free." During a financial crisis, even high-quality debt can default or lose value quickly.

If you want zero risk of losing money, a money market account is the right choice. If you can tolerate a small risk in exchange for potentially higher yields, a money market fund may work, but you should understand that risk is real.

What the SEC requires money market funds to hold

After 2008, the SEC rewrote the rules for money market funds. Today, a fund must hold only securities that mature in 60 days or less on average, and the portfolio's weighted average maturity cannot exceed 60 days. This means the fund is constantly rolling over its holdings into fresh, short-term debt.

The fund can only buy debt rated in the top two categories by at least two major rating agencies. For commercial paper, that means A-1 or P-1 ratings. For other debt, it means Aaa or Aa ratings from Moody's or AAA or AA from Standard & Poor's. The fund cannot hold more than 5 percent of its assets in any single issuer (except U.S. Treasuries, which have no limit).

These rules make defaults rare. But they do not prevent losses. If a highly-rated borrower suddenly downgrades or defaults, the fund's holdings lose value immediately. The fund also faces interest-rate risk: if rates rise sharply, older holdings become less valuable relative to new ones, and the share price falls.

When money market funds have actually lost money

Losses are uncommon. Between 1971 and 2023, only a handful of money market funds broke the buck. The 2008 crisis produced the most: the Reserve Primary Fund and a few others. In 2020, during the COVID-19 market panic, some funds came close but did not break the buck. The Federal Reserve stepped in to support the market, and prices recovered.

Outside of financial crises, money market fund losses are extremely rare. The funds are designed to hold the safest, shortest-term debt available. In normal times, that debt does not default, and interest-rate moves are small enough that the fund can absorb them without the share price falling below $1.00.

The risk is real but concentrated in periods of severe financial stress. If you are saving for something you need in the next few months, a money market account is safer. If you are holding money for longer and can tolerate a small risk, a money market fund may offer a slightly higher yield.

How to reduce your risk if you choose a money market fund

If you decide to use a money market fund, you can reduce your risk by choosing one that holds mostly U.S. Treasuries or Treasury repurchase agreements. These funds have almost no credit risk because the U.S. government backs the debt. They may yield less than a fund that holds commercial paper or bank CDs, but they are safer.

You can also check the fund's portfolio composition before you invest. The fund's prospectus and fact sheet list the types of securities it holds and the credit ratings of those securities. A fund that holds 80 percent Treasuries and 20 percent top-rated bank CDs is lower-risk than one that holds 50 percent commercial paper from various issuers.

Finally, compare the yield to a money market account at your bank. If the fund is offering only 0.10 percent more than a money market account, the extra risk may not be worth it. If the fund is offering 0.50 percent or more, you are being paid for the risk you are taking.

What happens to your money if a fund breaks the buck

If a money market fund's share price falls below $1.00, you have lost money on paper. Whether you lock in that loss depends on whether you sell. If you hold the shares and the price recovers, you do not realize the loss. If you sell while the price is down, you lock in the loss.

After 2008, the SEC created a "gating" rule that allows funds to temporarily freeze redemptions if the share price falls below $0.995. This is meant to protect remaining shareholders from a run on the fund. If you try to withdraw money and the fund is gated, you may not be able to access your cash immediately. This rule is controversial because it can trap your money, but it is designed to prevent a panic that would force the fund to sell holdings at fire-sale prices.

The SEC also allows funds to impose a 2 percent fee on redemptions if the share price falls below $0.995. This fee is meant to discourage withdrawals during a crisis and protect the fund's stability.

Money market funds versus other short-term savings options

If you are deciding where to park cash for the short term, you have several options. A money market account offers FDIC insurance and zero market risk, but yields are usually lower than a money market fund. A high-yield savings account offers the same FDIC insurance and often similar or better yields. A Treasury bill (T-bill) offers the safety of U.S. government backing but requires a minimum investment and has less liquidity than a fund.

A certificate of deposit (CD) offers FDIC insurance and a fixed rate, but your money is locked up for a set term. A money market fund offers liquidity and potentially higher yields, but you take on credit risk and interest-rate risk.

For most people saving for the short term, a high-yield savings account or money market account is the safest choice. For people who understand the risks and want slightly higher yields, a Treasury-focused money market fund is a reasonable middle ground. For people who want the highest possible yield and can tolerate more risk, a diversified money market fund may work, but you should read the prospectus and understand what you own.

Frequently Asked Questions

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

No. Even in the worst case, a money market fund's share price cannot fall to zero. The lowest it has ever gone was $0.97 in 2008. Because the fund holds only short-term, high-quality debt, the risk of total loss is essentially zero. You could lose 3 percent or more in a severe crisis, but not 100 percent.

Is a money market fund safer than a savings account?

No. A savings account at a bank is FDIC-insured up to $250,000, so your balance cannot fall due to market moves or borrower default. A money market fund is not insured and can lose value. A money market account (a bank product) is safer than a money market fund (a mutual fund). Do not confuse the two.

What happens if the fund manager makes a bad investment?

The SEC's rules limit what a money market fund can buy, so the manager has little room to make a truly bad bet. The fund can only hold top-rated short-term debt. If the manager buys a security that later downgrades or defaults, the fund's share price falls, but the manager cannot invest in junk bonds or long-term debt. The rules are strict by design.

Should I move my money out of a money market fund if I think a crisis is coming?

If you are worried about a financial crisis, moving to a money market account or high-yield savings account is safer because those products are FDIC-insured. But trying to time a crisis is difficult. If you move out and no crisis happens, you may have missed higher yields. If you stay in and a crisis does happen, you may lose a small amount. The safest approach is to use a money market account if you want zero risk, or a Treasury-focused money market fund if you want slightly higher yields and can tolerate small risk.

Do money market funds pay interest or dividends?

Money market funds distribute income as dividends. The fund collects interest from the securities it holds and passes that income to shareholders as dividends. The dividend is usually reinvested automatically, which means your share count increases. This is different from a savings account, where interest is added to your balance directly.