Money Market Funds and the Stable NAV

Most mutual funds let their share price float with the market — buy a bond fund and its NAV moves every day with interest rates. A money market fund is built to do the opposite: it holds a portfolio of very short-term, very safe debt (Treasury bills, commercial paper, repo) and is engineered so its share price sits at exactly $1.00, day after day, regardless of small wiggles in the value of what it holds underneath. Investors put in a dollar, and — outside of a crisis — they expect to get a dollar back plus a small amount of interest, treating the fund almost like a bank deposit even though it legally isn't one.

The mechanism behind the flat $1.00 is an accounting convention called amortized cost. Instead of marking each bond in the portfolio to its current market price every day, the fund carries it at purchase cost adjusted smoothly toward face value as it approaches maturity. Because the fund only holds debt maturing in days or weeks, the gap between amortized cost and true market value is normally tiny, so rounding it away and reporting a constant $1.00 doesn't meaningfully misstate anything. Regulators allow this only within limits — funds must also track a "shadow NAV" computed at real market prices, and if that shadow price drifts too far from $1.00, the fund is required to act, including converting to a floating share price or restricting redemptions.

The $1.00 peg is a convenience, not a guarantee. In 2008, one prime money market fund's shadow NAV fell far enough that it had to reprice its shares below a dollar — an event the industry calls "breaking the buck" — triggering a wave of redemptions across similar funds until the government stepped in with guarantees. That episode is why post-crisis rules now force many institutional money market funds to float their NAV like ordinary funds, while government and retail funds are still permitted the stable $1.00 convention, subject to tighter portfolio and liquidity rules.