The Money Market Fund Fiction

Money market funds are investment vehicles that masquerade as rock-solid banking services

Don Phillips 6 September, 2012 | 3:23PM

What do money market funds and the Harry Potter novels have in common? Both are well-executed fictions that have become beloved cultural institutions. But while the Potter stories hold a secure spot in our imaginations, the next few months will tell whether money-market funds continue to play a central role in our finances.

That money market funds are less obvious fictions doesn’t make them any less acts of make-believe than popular novels. Money funds are investment vehicles that masquerade as rock-solid banking services. In a sense, they are the supreme realization of the mutual fund industry’s efforts to productize investing. Money funds are packaged so as to minimize the perception of risk and market volatility—two things that are the essence of investing, but also things the public doesn’t like. By creating the impression of perfect stability, the fund industry persuaded the public to take risks it otherwise might not have taken. The public so loved this perception of security and higher returns that it moved massive amounts of assets out of banks and into fund industry coffers.

Money funds are investment vehicles that masquerade as rock-solid banking services

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About Author

Don Phillips  is a managing director at Morningstar and Morningstar’s president of fund research.

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