Foreword: In this question, I ask NOT about default risk.

Abbreviate 'money market mutual funds' to MMMF. MMMF are a type of mutual fund, which is always riskier than cash, per this MoneySense article dated Dec 4 2012, with which I agree:

[...] Since mutual fund prospectuses clearly state that the value of the units of mutual funds will fluctuate, no mutual fund company is under any obligation to make good your loss should the money market fund’s unit value slip below what we’ve come to think of as the norm. [...]

I am perturbed instead by the quotes below which imply that MMMF are as safe as and equate to cash, and so which conflict with the foregoing.

Source: Investing For Canadians For Dummies, 3 Ed (2009) by Tony Martin, Eric Tyson

[p 16:] Cash equivalents are any investments that you can quickly convert to cash without cost to you.

Money market mutual funds are another type of cash equivalent. Investors, both large and small, invest hundreds of billions of dollars in money market mutual funds because the best money market funds produce higher yields than bank savings accounts. [...]

[p 39:] Another good choice is to keep your liquid savings in a money market mutual fund. These are the safest types of mutual funds around; for all intents and purposes, they equal a bank savings account’s safety. [...]

  • Do you have any stories of a MMMF breaking the buck? If you do then share them please. Otherwise, you are talking about a "What if" that really could go in many odd directions to my mind.
    – JB King
    Aug 21, 2015 at 15:57
  • 1
    @LePressentiment No one claimed that it is just as risky as cash, not the first author, not the second author. Cash and Cash equivalents is a specific term in professional accounting defined in IAS 7.7 .
    – base64
    Aug 21, 2015 at 18:06

2 Answers 2


"value slip below" vs "equal a bank savings account’s safety"

There is no conflict.

The first author states that money market funds may lose value, precisely due to duration risk.

The second author states that money market funds is as safe as a bank account.

Safety (in the sense of a bond/loan/credit) mostly about default risk. For example, people can say that "a 30-year U.S. Treasury Bond is safe" because the United States "cannot default" (as said in the Constitution/Amendments) and the S&P/Moody's credit rating is the top/special. Safety is about whether it can default, ex. experience a -100% return.

Safety does not directly imply Riskiness. In the example of T-Bond, it is ultra safe, but it is also ultra risky. The volatility of 30-year T-Bond could be higher than S&P 500.

Back to Money Market Funds.

A Money Market Fund could hold deposits with a dozen of banks, or hold short term investment grade debt. Those instruments are safe as in there is minimal risk of default. But they do carry duration risk, because the average duration of the instrument the fund holds is not 0.

A money market fund must maintain a weighted average maturity (WAM) of 60 days or less and not invest more than 5% in any one issuer, except for government securities and repurchase agreements.

If you have $10,000,000, a Money Market Fund is definitely safer than a savings account.

1 Savings Account at one institution with amount exceeding CDIC/FDIC terms is less safe than a Money Market Fund (which holds instruments issued by 20 different Banks).

Duration Risk

Your Savings account doesn't lose money as a result of interest rate change because the rate is set by the bank daily and accumulated daily (though paid monthly).

The pricing of short term bond is based on market expectation of the interest rates in the future. The most likely cause of Money Market Funds losing money is unexpected change in expectation of future interest rates.

The drawdown (max loss) is usually limited in terms of percentage and time through examining historical returns.

The rule of thumb is that if your hold a fund for 6 months, and that fund has a weighted average time to maturity of 6 months, you might lose money during the 6 months, but you are unlikely to lose money at the end of 6 months. This is not a definitive fact.

Using GSY, MINT, and SHV as an example or short duration funds, the maximum loss in the past 3 years is 0.4%, and they always recover to the previous peak within 3 months. GSY had 1.3% per year return, somewhat similar to Savings accounts in the US.

  • @LePressentiment Tip: "OP" means Original Poster, i.e. you, and not Original Post. What you corrected is your question. Aug 22, 2015 at 2:05
  • @base64 Thanks. I updated my question. Would you please elucidate the investment (NOT default) risk of MMMF vs cash? The price of short-term debts (held by a MMMF) can decrease, and so negative rates of return are possible?
    – user10763
    Aug 22, 2015 at 13:59
  • Would you please respond in your answer, which is easier to read than comments?
    – user10763
    Aug 22, 2015 at 13:59

Money market funds have usually no limits on redemptions or fees. They're frequently used as an alternative to savings accounts. While technically loss is possible, the investments in these funds are done in short term high grade bonds (read the prospectus). I've never encountered money market underperforming a regular savings account.

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