What is a money market fund?
The money market is the market for very short-term borrowing: loans lasting from one day to around a year. A money market fund pools many people’s money and keeps it only in things like this, such as government treasury bills, short-term deposits and short-term IOUs issued by large organisations (commercial paper). Because the terms are so short, their prices usually move very little.
In the US SEC’s words, money market funds are generally lower-risk than most other funds, but have historically paid lower returns too. And they are not bank accounts: in the US, money in these funds is not covered by government deposit insurance as bank deposits are, so it is possible to lose some or all of it.
Imagine a few shopkeepers in the neighbourhood forming a pot that only lends for a week or a month, and only to the most reliable payers. The profit is small, but the money comes back quickly, and each of them can take their share out fast when needed. But if a borrower suddenly fails to pay, everyone’s share shrinks a little. A money market fund works the same way.
Why it matters to an investor
- To understand where short-term money can sit: it is one option for money needed within months, as long as the risks and rules are understood.
- To see why the return changes: the fund’s holdings roll over quickly, so when short-term rates change, its income changes quickly too.
- To tell “almost cash” from cash: even though its value is very steady, it is not a bank deposit and carries no guarantee.
- To see the effect of costs: because returns are low, the fund’s fees can eat a large part of them.
Why the return follows interest rates
A money market fund’s investments mature within days or months, and the fund then reinvests at the new rate. So its return moves roughly with short-term rates such as treasury bill yields, minus fees.
Treasury bills show how much these rates can change in Bangladesh: in April 2021 the 91-day bill yielded just 0.55%, and in June 2025 about 12%. When rates are very low, a fund’s fees can take a large part of its income, or even all of it; the US SEC warns of this risk too.
The lesson of 2008
In the US, most money market funds try to keep their value fixed at $1 a unit. On 16 September 2008 a large, long-established fund there, the Reserve Primary Fund, fell below that $1, which is called “breaking the buck”. The reason was that it held $785 million of debt issued by Lehman Brothers, which had just collapsed.
The lesson is simple: even very short-term lending is not risk-free. Who the fund has lent to, whether only government bills or company IOUs as well, decides how much risk it carries.
The situation in Bangladesh
We did not find a separate, well-known category of fund called a “money market fund” in Bangladesh, as there is in the US. The closest are open-end fixed-income funds, many of which keep a large part in treasury bills and bonds; but these can also hold long-term bonds, so they can move more. If a fund calls itself money market or “almost cash”, check its prospectus for what it actually buys.
Worked example
- Say short-term rates are very low and the fund’s investments earn 2% a year. The fund’s yearly costs are 1%. You get about 1%: around Tk 1,000 a year on Tk 1,00,000.
- If inflation that year is 5%, your money grew a little in amount but lost about 4% of its buying power.
- Now say rates rise to 12%, with costs still 1%. You get about 11%: around Tk 11,000 on the same Tk 1,00,000.
Result: the same fund with the same fee, but the return depends entirely on short-term rates at the time. When rates are low, the fee takes half the income. The numbers are only an example.
Common mistakes
- Thinking a money market fund is a bank deposit. It is a fund, with no guarantee.
- Assuming last year’s return will continue. When short-term rates change, the return changes quickly.
- Ignoring fees on a low-return fund. When income is small, fees are a large share of it.
- Assuming from the name that a fund holds only government bills. It may also hold company IOUs or long-term bonds.
A money market fund is a basket of very short-term loans: steady and easy to withdraw, but not guaranteed, and its return follows short-term interest rates, minus fees.