Money Market Funds (MMFs)

Money Market Funds (also known as MMFs or money market mutual funds) are a special type of mutual fund designed to be a low-risk parking spot for your cash. Think of them as a hybrid between a checking account and an investment. Their primary goals are to preserve your capital and provide high liquidity, meaning you can get your money back quickly and easily. To do this, MMFs invest in a portfolio of high-quality, very short-term debt instruments like government bonds and corporate debt. The holy grail for most MMFs is maintaining a stable share price, or net asset value (NAV), of $1.00 or €1.00. This makes them feel as safe and stable as cash in the bank, though it's crucial to remember they are still investments and carry a small amount of risk. They are a favorite tool for savvy investors, including Warren Buffett, who need a place to store “dry powder” while waiting for the perfect investment opportunity to appear.

Imagine thousands of investors pooling their cash together. A fund manager then takes this giant pool of money and lends it out for very short periods—often just overnight or for a few months—to governments, banks, and large corporations with excellent credit ratings. In return for these short-term loans, the fund earns a small amount of interest, which it then passes on to you, the investor, as a dividend. The types of securities they invest in are often called “cash equivalents” because they are so stable and can be converted to cash very quickly. These include:

• Treasury bills (T-Bills): Short-term debt issued by the U.S. government, considered one of the safest investments in the world.
• Certificates of deposit (CDs): Large, negotiable CDs issued by banks.
• Commercial paper: Short-term, unsecured debt issued by large corporations to finance things like payroll and inventory.
• Repurchase agreements (Repos): A form of overnight lending where the fund buys a security (like a T-Bill) with an agreement to sell it back the next day at a slightly higher price.

The extremely short maturity of these assets is key. It means the fund isn't locked into a specific interest rate for long, making it less vulnerable to sharp rate changes and helping it maintain that stable $1.00/€1.00 NAV.

For a value investor, patience is a superpower. MMFs are the perfect tool to help you exercise that power. They are much more than just a glorified savings account.

Value investing is a game of waiting. You do your research, identify a wonderful business, but its stock price is too high. What do you do? You wait. Instead of letting your cash sit in a low-yield bank account, you can “park” it in an MMF. It will typically earn a slightly better return while remaining liquid and ready to deploy the moment your target company's stock falls to an attractive price. This is the essence of keeping your powder dry. While MMFs in the U.S. are not insured by the FDIC like bank deposits, they are highly regulated, primarily under Rule 2a-7 of the Investment Company Act of 1940, which imposes strict quality, maturity, and diversification requirements.

MMFs are also a fantastic gauge of overall market sentiment. When investors are fearful and uncertain about the economy or the stock market, they flee from risky assets like stocks and pour their money into the perceived safety of MMFs. Watching the total assets held in MMFs can tell you a lot. A massive spike in MMF assets often coincides with market bottoms—precisely the time a contrarian value investor gets interested. Conversely, when money starts flowing out of MMFs and back into stocks, it can signal that confidence is returning and the best bargains may already be gone.

While MMFs are considered very safe, they are not risk-free. It's important to understand the potential pitfalls.

This is the MMF industry's cardinal sin. “Breaking the buck” occurs when a fund's NAV per share falls below the stable $1.00/€1.00 target. This is exceptionally rare but can happen if one of the fund's underlying investments defaults. The most famous example occurred during the 2008 financial crisis when the Reserve Primary Fund broke the buck after its holdings in defaulted Lehman Brothers debt became worthless. This event caused a widespread panic in the financial system and led to significant regulatory reforms in both the U.S. and Europe to make MMFs even more resilient.

Regulations differ slightly across the Atlantic. In the U.S., you'll find “government” MMFs (which invest almost exclusively in government debt and repos) and “prime” MMFs (which can also hold high-quality corporate debt). In Europe, a similar framework exists under the Money Market Fund Regulation (MMFR), which categorizes funds based on how they value their assets, such as Constant NAV (CNAV), Low Volatility NAV (LVNAV), and Variable NAV (VNAV) funds. It's worth knowing what type of MMF you are investing in and what specific rules govern it.

Money market funds are not a vehicle for getting rich. You won't see high growth from them. Instead, they are an indispensable tool for cash management and capital preservation. For the patient value investor, an MMF is the perfect holding pen for capital—a safe, liquid, and productive place for your money to wait until you're ready to pounce on the next great investment.