A money-market fund (MMF) pools cash from investors and lends it into exactly the short-dated instruments this module has been building (repo, commercial paper, certificates of deposit, T-bills) promising near-instant liquidity at (historically) a stable $1.00 net asset value. Two portfolio statistics discipline how short "short-dated" actually is: weighted average maturity (WAM), the dollar-weighted average number of days to the next interest-rate reset or maturity across the whole book, and weighted average life (WAL), the same calculation using final legal maturity (ignoring resets), a distinction that matters for floating-rate holdings. US SEC Rule 2a-7 caps a taxable prime fund's WAM at 60 days and WAL at 120 days, precisely so a fund cannot quietly stretch into longer, riskier paper while still marketing itself as "cash-like."
How are money market funds regulated?
The critical regulatory line, and the one a fund's structure is built around, is government versus prime. A government MMF holds only Treasuries, agency debt, and repo collateralized by them (essentially credit-risk-free) and may still price at a stable $1.00 NAV using amortized-cost accounting. A prime MMF holds commercial paper, CDs, and other credit-sensitive instruments in pursuit of a slightly higher yield, and therefore carries real credit risk that a stable $1.00 sticker price can quietly hide. The 2016 SEC reform forced institutional prime and institutional municipal funds onto a floating NAV (transacting at four decimal places, e.g. $0.9987, marked to market daily) while retail prime/muni funds and all government funds kept the stable-NAV convention; a 2023 amendment (compliance phased through 2024) replaced the earlier discretionary redemption gates and liquidity fees with a mandatory liquidity fee for institutional prime/muni funds whenever net redemptions cross a threshold, spreading the cost of a redemption run across the redeeming investors rather than everyone left behind. The India analogue is the SEBI-regulated liquid and overnight debt mutual fund category, which similarly caps portfolio maturity (a liquid fund's holdings must mature within 91 days) and (after real, name-specific credit events in Indian liquid funds) moved to mark-to-market valuation for the shortest end of the book rather than pure amortized cost, the same stable-versus-floating tension the US reform addressed from a different regulatory starting point.
Advertisement
What does it mean to break the buck?
Why does the floating-versus-stable distinction matter enough to legislate? Because a stable $1.00 NAV creates a discrete cliff: as long as a fund's true, mark-to-market value stays within a $0.995–$1.005 "shadow NAV" band, it can keep transacting at a flat $1.00, indistinguishable from cash, and the instant a credit loss pushes the shadow NAV below $0.995, the fund must "break the buck," reprice abruptly, and, historically, suspend redemptions while it sorts out who gets paid what. That cliff-edge is precisely what triggers a run: investors have every incentive to redeem before the break becomes public, because the first ones out get $1.00 and the last ones out get a proportional share of whatever remains. A floating NAV removes the cliff structurally, the price just drifts down smoothly with the portfolio's true value, with no discrete "breaking" event and no first-mover redemption advantage, which is the entire point of the 2016 reform, not a side effect of it. Worked Example 5 constructs the arithmetic of a break and contrasts it with the floating-NAV alternative.