A money market fund, or money market mutual fund aims to preserve capital, and maintain a steady Net Asset Value (NAV) while being highly liquid. They achieve this by investing in low-risk assets like cash, short-term bonds, and bank bills. Some investors might choose to keep their money in a money market fund rather than investing it on the share markets or in other assets, or having it sit in a bank account. 

While they’re considered one of the safest ways to invest, they’re not without risk. There are pros and cons to keeping your cash in a money market fund; they often pay dividends, but they can have an impact on your tax obligations if you are a Kiwi investing overseas. We explain more about dividends and Foreign Investment Fund (FIF) tax rules below. But first, why store funds in a money market fund?

How does a money market fund work?

Money market funds, also called money market mutual funds, are a common place to park money temporarily - as short as just one day - before it’s invested elsewhere or withdrawn as cash. Because they offer a ‘high degree of safety’, are readily accessible to withdraw from and some may provide higher returns than traditional savings accounts, money market funds may be the preferred option for risk-averse people looking to store their money in the short term. 

Money market funds are types of mutual funds that spread money across lower-risk investments, such as cash, or cash equivalent securities, certificates of deposit, or US Treasury securities. Managed by fund managers and backed by investment fund companies, a money market fund’s goal is keeping the value of the money stable. This means that while returns can fluctuate, ideally in the short term,$1 invested will always be worth around $1 - referred to as per-share net asset value (NAV).

Money market funds are available in various countries around the world and function in much the same way. The names and regulations vary between countries, so today we’ll cover the definition of a money market fund specific to people investing in the US markets.

Different types of money market funds

There are many money market funds that are considered ‘safe investments’ to park money at low cost. Some high profile investment companies that sponsor money market funds include Fidelity, Dreyfus BNY Mellon, Invesco, JPMorgan, BlackRock and Vanguard.

In the US, money market funds typically fall into four categories: 

• US Treasury funds include a mix of low risk US government securities and are exempt from tax but offer lower returns. 
• US government and agency funds comprise a mix of federal government agencies bonds and notes that have the benefit of being backed by US Treasury and Congress. Some also invest in foreign markets, emerging markets, and mortgage-related securities making them slightly riskier but with the potential to offer slightly higher returns. 
• Diversified taxable funds invest in US corporations and foreign companies’ commercial paper, like repurchase agreements or payroll short-term debt. Others invest in foreign bank-issued deposits. These funds come with slightly more risk but potentially higher returns.
• Tax-free funds are the most complicated and risky of the money market funds. They’re exempt from paying US federal tax and suit US investors who either live in high tax-paying US states or sit in a higher tax bracket.

Money market exchange-traded funds (ETFs)

You can invest in exchange traded money market funds through Hatch, and there are several available on the platform. Like any ETF, you should look to metrics like the expense ratio and dividend yield when deciding which investment is right for you. Note that the dividend yield can change constantly, even daily. This is because it reflects the underlying assets within the fund, and current short-term interest rates.

Data source Stock Analysis November 2025 - please check for up to date figures

‍

If you add some of these to your Hatch watchlist, you’ll notice that the returns charts for money market funds often follow a uniform zig-zag pattern. This is because the interest on the money market fund accrues until the dividend distribution date. The money is making money, then is paid out to fund holders at regular intervals to maintain a relatively consistent per-share NAV. 

What are the benefits of a money market fund?

Along with being considered generally conservative ‘safe investments’, money market funds can pay dividends. That means, while your money is parked in a money market fund, it's always working for you.

Money market dividends

Most money market funds pay monthly or quarterly dividends that typically mimic the current US interest rates. So if interest rates are around 2%, investors will typically receive around 2% of any money sitting in the fund as a dividend. 

What are the risks of a money market fund?

Typically money market funds are considered lower-risk funds. But that doesn’t mean they are completely immune from risk altogether - no investment is! 

There are still possible risks that a money market fund may be exposed to. These are: 

• Liquidity risk - may occur during extreme market volatility when more money is being withdrawn than there is available in the fund. 
• Credit risk - would only occur in very atypical circumstances when the credit rating is downgraded or there is a high risk of default. This is an unlikely scenario as money market funds are required to have minimal credit risk and are expected to be highly rated. 

NZ tax rules for money market funds

Money market funds are often used by investing platforms or financial institutions to store any uninvested money over the short term. This is because it’s the simplest option for most investors. But it does affect some investors when it comes to tax time. This is because under New Zealand’s Foreign Investment Fund (FIF) tax rules, the available balance showing in a customer account is treated as an investment, which affects investors who have $50,000 NZD or more invested overseas during a tax year. 

Kiwis are required to pay tax on US dividends (Hatch investors, we sort this for you!). But in addition, any money invested in a money market fund on your behalf by an investment platform - either before or after investing in the share markets - is included in the total investment cost amount each year and counts towards the $50,000 NZD FIF tax threshold.

An example: 

If a Kiwi had $49,000 NZD invested in an overseas share market and then deposited $2,000 NZD into an investment platform account - such as Hatch - that $2K NZD, which is automatically invested in the money market fund, is added to the total investment cost adding up to $51,000 NZD. Therefore New Zealand’s FIF tax rules would apply. ‍

Visit our Tax Centre to understand how FIF rules affect you‍

Money market funds are a low risk, hassle-free way to store money while still getting returns, making them one less thing to think about while you’re on your investment journey.