About Money Market Account Rules

by Carmelo J. Montalbano

Overview

Money market account rules pertain to the regulations that mutual funds must follow in order to qualify and maintain their preference as a money market fund. These rules are important as investors use money markets as checking account substitutes and therefore must have certainty of principal at all times. "Breaking the Buck" for a mutual fund almost always guarantees that the fund will fall into investor disfavor.
Definition of a Money Market Account

Money market accounts are composed of money market instruments and usually managed by a mutual fund. They provide fundholders with greater diversification and higher yields than are achievable with bank certificates of deposit.

Money Market Insurance

Money markets are not insured though they may contain United States government issues. There is no guarantee or backing from the Federal Deposit Insurance Corporation as there is with bank certificates of deposit.
Qualifications of a Money Market Fund

A money market fund is responsible to maintain its net asset value at $1. The net asset value is determined by the weight average value of all the money market instruments in the portfolio.
Minimum Investment Period

Unlike certificates of deposit the entire account may be withdrawn at any time even though the average maturity of a bond fund is 30 days.
Importance of Net Asset Value Calculation

Net asset value must be maintained at a dollar so investors may write checks (properly called "drafts") on the money market account . Variance from the dollar asset value would cause more or less shares to be withdrawn for each check written. Such actions are called "breaking the buck" and would destroy the ease and confidence of using money market funds.
Specific Investments in a Money Fund Portfolio

Money markets contain a wide variety of short term liabilities including commercial paper, large bank certificates of deposit, variable rate preferred stock, government treasury bills, variable rate corporate bonds and overnight federal funds.

Overview