A government money market fund is a mutual fund that holds your cash in short-term U.S. government debt and related securities, aims to keep each share worth exactly $1.00, and pays you interest through regular distributions. Federal rules require at least 99.5% of the fund’s assets to sit in cash, government securities, or repurchase agreements backed by government securities, which is what makes this category one of the most conservative places to park money that needs to stay accessible.1eCFR. 17 CFR 270.2a-7 – Money Market Funds
What the Fund Holds
Rule 2a-7 of the Investment Company Act sets the 99.5% floor. That leaves almost no room for anything else; the small remainder covers operational cash needs.1eCFR. 17 CFR 270.2a-7 – Money Market Funds
In practice, the portfolio holds a few kinds of securities. Treasury bills are the most common, backed by the full faith and credit of the U.S. government. Funds also hold debt from federal agencies like the Government National Mortgage Association (Ginnie Mae) and obligations from government-sponsored enterprises such as the Federal Home Loan Banks and the Federal Farm Credit Banks. Repurchase agreements round out the mix. These are short-term loans in which the fund buys government securities from a counterparty that agrees to repurchase them the next day or within a few days, with the securities serving as collateral.
How the $1.00 Share Price Stays Stable
Unlike a stock fund, where shares fluctuate daily, a government money market fund aims to keep each share worth one dollar. You earn returns through interest distributions, not price appreciation.
Two accounting techniques make the stable price work. The amortized cost method values each security at what the fund paid for it, then gradually adjusts that value toward the security’s face value over its remaining life. That avoids the daily price swings you would see with mark-to-market pricing. The penny-rounding method rounds the fund’s net asset value to the nearest cent, so tiny fluctuations in the portfolio do not budge the share price from $1.00.1eCFR. 17 CFR 270.2a-7 – Money Market Funds
The fund’s board of directors has to determine that these methods fairly reflect the fund’s actual market-based value. If the gap between amortized cost and market value grows too large, the board must step in. In rare cases a money market fund can “break the buck,” meaning the share price drops below $1.00. In more than fifty years of money market fund history, that has happened only once, in 2008, and to a prime fund, not a government fund.
Maturity and Liquidity Rules
Rule 2a-7 tightly limits how long the fund’s holdings can take to mature, which directly controls interest rate risk. No individual security can have a remaining maturity longer than 397 days. The fund’s overall weighted average maturity cannot exceed 60 days, and its weighted average life, a related measure that ignores certain interest rate reset features, cannot exceed 120 days.2eCFR. 17 CFR 270.2a-7 – Money Market Funds Those short durations mean the portfolio constantly rolls over into new securities, which limits the damage a sudden interest rate spike can do to the fund’s value.
Liquidity requirements add another layer. Funds must keep at least 25% of total assets in daily liquid assets, which are cash and securities that convert to cash within one business day. They must also hold at least 50% in weekly liquid assets.3Federal Register. Money Market Fund Reforms, Form PF Reporting Requirements for Large Liquidity Fund Advisers, Technical Amendments The SEC raised these thresholds in 2023 from 10% and 30% to make sure funds can handle large waves of redemptions without distress. Government money market funds are also not subject to the mandatory liquidity fees that apply to institutional prime and institutional tax-exempt funds when net redemptions exceed 5% of net assets in a single day.4U.S. Securities and Exchange Commission. Money Market Fund Reforms Fact Sheet
Getting Your Money Out
You can typically access your cash within one business day. Most government money market funds process redemption requests on the same day or the next business day, one of the main reasons investors use them instead of other fixed-income vehicles. Some funds offer check-writing or debit card features that function almost like a bank account.
Minimum investment requirements vary by share class. Many retail share classes at major brokerages have no minimum, while institutional share classes designed for large investors may require $1 million or more. Share class also affects the expense ratio you pay, which affects your net yield, so it is worth checking whether your brokerage offers an institutional class at your investment level.
Yields and Expense Ratios
Government money market fund yields move closely with the federal funds rate. The standard comparison tool is the 7-day SEC yield, a standardized calculation reflecting the fund’s income over the prior week. As of early 2026, government money market funds are generally yielding in the range of 3.5% to 4%, though that will shift as the Federal Reserve adjusts rates.
Expense ratios come straight out of your yield. If a fund’s gross yield is 4.0% and the expense ratio is 0.10%, your net yield is 3.90%. Expense ratios for government money market funds typically run between 0.07% and 0.50%, with the spread largely depending on share class. Institutional share classes with higher minimums generally charge less than retail classes. The difference sounds small, but on a large cash position held for months, it adds up. Compare the net yield after expenses rather than the gross yield when choosing between funds.
How the Income Is Taxed
Income from a government money market fund is reported as ordinary dividends on Form 1099-DIV, even though the underlying securities pay interest rather than corporate dividends.5Internal Revenue Service. Topic No. 404, Dividends and Other Corporate Distributions For federal purposes, those distributions are taxed as ordinary income at your regular rate.
State taxes are where the picture shifts. Under federal law, interest on direct U.S. Treasury obligations is exempt from state and local income tax.6Office of the Law Revision Counsel. 31 USC 3124 – Exemption From Taxation If your government money market fund holds mostly Treasury bills, a portion of your dividends may qualify for that state exemption. The fund typically publishes the percentage of its income derived from direct Treasury obligations each year, and you use that percentage to calculate how much to exclude on your state return. Funds that hold agency debt or repurchase agreements alongside Treasuries will have a lower exempt percentage than Treasury-only funds. In a high-tax state, this distinction can meaningfully affect your after-tax return.
Not FDIC-Insured
A government money market fund is not a bank account and is not insured by the FDIC. The FDIC explicitly lists mutual funds, including money market funds, among the financial products it does not cover.7Federal Deposit Insurance Corporation. Deposit Insurance If the share price ever dropped below $1.00, no federal deposit guarantee would make you whole.
What you do have is SIPC protection against your brokerage firm failing. If the firm holding your shares goes bankrupt, SIPC coverage returns your securities or their cash value, up to $500,000 per customer with a $250,000 sublimit for cash claims.8SIPC. What SIPC Protects SIPC does not protect against a decline in the value of your investment; it only ensures you get your assets back if the brokerage itself disappears. FDIC guarantees dollars, SIPC guarantees custody.
As a practical matter, the risk of losing money in a government money market fund is very low. The assets are backed by the U.S. government, the maturity is measured in weeks, and half the portfolio must sit in weekly liquid assets. The absence of FDIC insurance is a legal reality worth knowing, not on its own a reason to steer clear of these funds.