Money market funds are a special class of open-end mutual funds that investors view as uninsured interest-paying bank accounts. Unlike other open-end mutual funds, regulators permit money market funds to accept deposits and satisfy redemptions at a constant price per share (typically one unit of the local currency—for example, a euro per share in the eurozone) if they meet certain conditions. In particular, they may only hold money market securities—that is, generally very short-term, low-risk debt securities issued by entities with very high-quality credit. In that case, regulators allow money market funds to pay daily income distributions to their shareholders, which they typically distribute at the end of the month. These arrangements ensure that money market funds’ NAVs remain very close to their constant redemption price.
Money market funds are vulnerable to a run on assets. In particular, if investors expect that the value of their money market funds will decline in the near future, they may rush to redeem their shares before the NAV falls. These actions can be destabilising because they force funds to sell portfolio securities when the market is falling.
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