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The Curious Bag
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According to the Securities and Exchange Commission (SEC), the law requires that money market funds invest in low-risk securities. These securities include government securities, certificates of deposit, commercial paper of companies, or other highly liquid securities that can easily be sold.
Background
A money market fund is a type of mutual fund that attempts (but does not guarantee) to keep its net asset value (NAV) at $1.00 per share, while only the rate of return fluctuates.
Government Securities
Government securities include treasury bills, bonds and notes.
Certificates of Deposit
Certificates of deposit (CDs) are special types of insured deposit accounts with financial institutions.
Commercial Paper
Commercial paper is short-term debt (rarely more than 270 days) issued by companies to fund short-term liabilities. Investing in commercial paper is generally of very low risk because the companies that issue it have high credit ratings backed by bank lines of credit.
Considerations
The SEC regulates money market funds under the Investment Company Act of 1940. As with all investments, it's important to read the prospectus and understand the potential risks and returns of the money market fund you are buying.
Source:
Investopedia: Commercial Paper--Definition
More Information:
Federal Reserve Bank of New York: Commercial Paper Funding Facility: Frequently Asked Questions
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